ULIP: What’s The New Regime All About?

In response to the ULIP guidelines issued by the insurance regulator IRDA on June 28, 2010, most of the insurance companies have withdrawn many of their existing unit-linked insurance plans (ULIPs) and will start issuing a new set of policies. While the existing policyholders will not be affected as the old policies will continue to be in force, those who wish to buy new policies will have to wait until the new plans are in place. Here’s a peek into the details of the new guidelines and what to look for.

Experts feel that the immediate impact of the latest ULIP guidelines would be on issuing pension plans as the regulator has introduced a minimum guaranteed return of 4.5 per cent on unit-linked pension products. This move has been initiated in order to protect the savings of pensioners wherein the guarantee of minimum returns would make it difficult for issuers to invest pension funds in risky assets such as equities. Hence, very few pension plans are expected to be on offer after September 2010. As such, if you are interested in unit-linked pension plans you will need to decide fast. Another major step taken by the IRDA under the new guidelines is with respect to the surrender charges. Previously, the return on the investment was dependent on the discretion of the insurer.

These charges are now standardised (see table below). In a bid to promote ULIP as a long-term product, the lock-in period has been increased from three to five years. This means that in case a policyholder surrenders the policy before five years, the fund value will be returned to him only after this period. To keep the interest of the consumers in mind, the regulator has made it mandatory for insurers to pay a minimum of 3.5 per cent interest per annum on the fund value. For instance, a healthy male opts for a ULIP with premium of Rs 50,000 and decides to discontinue the plan after paying two annual premium installments. Assuming the fund to grow at 6 per cent per annum, the fund value at the time of discontinuation would be Rs 1,03,000. The insurance company will deduct Rs 4,000 from the fund value as surrender charges (see the table). According to the new guidelines the insurer would pay 3.5 per cent interest per annum on the remaining fund for three years.

This means the policyholder would receive Rs 1,09,760 three years after the discontinuation of the policy. The new guidelines give investors the flexibility to surrender a plan without losing much of their fund value. Herein lies a problem as it may also provoke distributors to promote policy churning wherein the distributor may ask a policyholder to surrender and opt for a different policy under the pretext of getting higher returns. Investors need to be wary of such short-term ploys as insurance is a long-term play and one needs to remain invested for quite some time to obtain substantial returns.

Through the new guidelines IRDA has also tried to restructure the complaint cell for the policyholder wherein insurance companies need to have a helpline number and a grievance officer to tackle complaints. Insurance companies must now acknowledge the receipt of a complaint and mention the procedure as well as the time [PAGE BREAK]

they would take for redressing the grievance to the customer within three days of the receipt of a complaint. In case the insurer fails to respond within two weeks, one has the option to approach the IRDA to register a complaint. As per the new guidelines, ULIP commissions have reduced as compared to the traditional products where it remains high.This may make the insurance agents focus more on selling traditional products such as term insurance, endowment, and money-back policies. Hence, investors should be sure of their needs and long-term requirements before opting in. For tax-saving, one may go for ULIPs as opposed to endowment and money-back policies.