IRDA's lease of life for lapsed ULIPs
12/5/2011 11:22 AM Monday
Imagine a situation wherein you forget to pay the premium of your insurance policy by the due date. What is worse is that despite repeated reminders from the company asking you to renew the policy within the grace period, you fail to do so. While the reasons for not paying the premium may range from a temporary financial problem to something more serious, the end result is the loss of insurance cover. In the process, the whole purpose of buying life cover – to support the family financially when one is not around – would be entirely defeated, and your worst fears could come true if you were to lose your life.
ULIP (unit-linked insurance plan) holders will now be able to breathe easy, thanks to the Insurance Regulatory and Development Authority’s (IRDA) recent decision of allowing policyholders to revive their policies within two years from the due date of the premium. Under the earlier guidelines, policyholders could not revive their policy once 60-75 days had elapsed after the due date. The policy was treated as withdrawn, and the balance amount moved to the discontinued policy fund. With the new guidelines, one has the option of reviving the policy uptil a period of two years (but within the lock-in period of five years). Note that this guideline will be applicable only to ULIPs issued after September 1, 2010. However, ULIPs that have crossed the lock-in threshold of five years will not be able to benefit from these regulations.
IRDA’s latest move will also bring changes to the returns earned during the interim period. Until now, if premiums were not paid within the grace/notice period, the accumulated funds were transferred to the discontinued policy fund. This remained locked in till the end of the fifth year of the policy, only after which it would become payable to the policyholder. Under the new regime, once the monies are moved to the discontinued policy fund in the first five years, the policy can be reinstated for up to two years. In such cases, the cover will be reinstated subject to underwriting, and the client will again get a choice of investment funds. For policies that are more than five years old, reinstatement is not possible, as the funds become payable immediately after discontinuance.
The regulator currently mandates that companies offer a minimum guarantee of 3.5 per cent per annum for funds pertaining to the discontinued policy. Now, the returns will be linked to the savings account interest rate of the State Bank of India (SBI). At the moment, the savings account rate for all banks in India stands at four per cent per annum. However, with the savings bank rate being deregulated by the RBI in its recently-announced quarterly credit policy, this can be changed at the bank's discretion.
As per the earlier norms, once the balance amount post lapsation (of the policy) moved into the discontinuance fund, there were no fund management charges even though the companies were actively managing the portfolio. Under the new guidelines, an insurance company can charge a fund management fee up to a maximum of 0.5 per cent after providing for minimum guarantee. Upon revival, however, the insurer will have to add the deducted discontinuance charges back to the fund value and allot units of the segregated fund chosen by the policyholder at the NAV (net asset value) as on the date of the policy's reinstatement. The guidelines make it clear that for policies that are discontinued, insurers cannot levy any charges other than those for discontinuance and fund management.
Failing to buy life insurance at all can be one of the most costly mistakes you can make with respect to your family’s financial security. If you are among those who neglect their insurance policies, letting them wander aimlessly from renewal to renewal, it is in your own interest to reconsider the way you operate. It is important to understand that needs increase as time goes by, but all too often, insurance coverage stays the same. In such a scenario, it is important that you atleast keep your existing insurance going.
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