New guidelines for unit-linked insurance plans (Ulips) and traditional life insurance policies will come into effect from February 1, 2020
The Insurance Regulatory and Development Authority of India, (IRDAI), has instructed insurers to make changes in Ulips and traditional life insurance policies. Some of these changes include: Time period within which a policy can be revived has been increased from two to three years; the sum assured for buying Ulips reduced from ten to seven times the premium paid; withdrawal limit of pension plans increased to 60 percent; surrender value norms revised to benefit policyholder; and standardised partial withdrawal limit, i.e., you can now partially withdraw thrice during the entire policy tenure.
Will these new rules benefit policyholders?
Here is a closer look at each of these changes and how they will impact a policyholder.
- Increase in time period allowed for policy revival
According to the new guidelines, IRDAI has asked insurers to increase the time period allowed for the revival of life insurance policies. Santosh Agarwal, Chief Business Officer- Life Insurance, Policybazaar.com said that to comply with the ‘revival of policy’ provision, insurers have to increase the time period allowed for the revival of Ulips to three years from the date of the first unpaid premium. At present, you get 2 years to revive your policy. For non-linked insurance products, the time period allowed for the revival of policy will be five years.
How it will impact you:“This is one of the best changes that has been introduced since it takes care of the insured’s interest and their financial conditions,” said Agarwal. For instance, if you have not been able to pay premiums and discontinued your life insurance policy because of financial exigency, you will now get an additional year to revive that discontinued policy.
- The sum assured for buying Ulips reduced from 10 times to 7 times the premiums paid
From February 1, the terms and conditions of buying Ulips will become uniform across all age groups. From February 1, the minimum sum assured for buying Ulips for a policyholder below the age of 45 years will be reduced from ten times to seven times the annual premium paid.
At present, only those above 45 years of age are eligible to buy Ulips with sum assured less than 10 times of annual premium.
How it will impact you: A lower sum assured could result in better returns as lesser amount of mortality charges will get deducted. However, going for a lower sum assured, that is, less than 10 times of the annual premium paid will not help you avail tax benefits. Currently, you can avail tax benefit on policies which have a sum assured of 10 times the annual premium or more.
Aalok Bhan, Director and CMO, Max Life Insurance said that to bring in greater convenience to policyholders, Ulips will be available with a risk cover equal to 105 percent of the total premiums paid (incase this amount is higher than sum assured and fund value) on the settlement period. “Additionally, you now have the option to reduce premiums up to 50 percent of the original annualised premium after the end of the five-year lock-in period, offering convenience to you (policyholder) if you are not able to pay up the larger premium due to any financial exigency,” he said.
- Pension plans to benefit the policyholder
The insurer offering a mandatory guarantee on maturity proceeds on pension plans will now become optional.
At present, insurers have to offer guarantees on maturity proceeds. This means that they have to invest in debt instruments to give guarantees on maturity proceeds, which in turn lowers the potential return on investment. This is one of the reasons why Ulip pension plans have lost relevance in the case of deferred annuity plans.
A unit-linked deferred annuity insurance plan is an insurance contract where an insurer promises to pay the policyholder a regular income, or a lump sum, from a pre-decided future date. To fetch the benefit, the insured has to pay a sum (premium) at regular intervals till the annuity matures.
Now as per the new rule, policyholders can decide whether they want assured returns.
How it will impact you: The new rule allows the policyholder to opt for the possibility of earning a higher return on their investment by choosing the ‘no guarantee option’ and by asking the insurer to increase equity exposure in the policy. However, it is to be remembered that any equity investment comes with zero guarantee of returns or capital, therefore when one chooses the ‘no guarantee option’, there is no guarantee of the capital or returns.
If you have a long-term financial goal, you can ask the insurer to invest a higher amount in equity and take the risk of ‘no guarantee’ to try to create a bigger retirement corpus.
Apart from this, the new guidelines also give a policyholder the option to extend the accumulation period or deferment period within the same policy with the same terms and conditions up till the age of 60
Bhan said, “Consumers can now look at building a larger corpus where they can now also initiate partial withdrawals only thrice during the entire policy term up to a maximum of 25 percent of the fund value, the partial withdrawal limit wasn’t fixed earlier by the regulator.”
- Withdrawal limit from pension plans increased to 60 percent
To improve flexibility and liquidity for policyholders, insurers are now mandated to allow beneficiaries to withdraw a larger lump sum of 60 percent at vesting, surrender or death, as opposed to the current 33 percent. However, when you withdraw a lump sum from pension plans, only one-third of the corpus will remain tax-free (as is the case now), not the entire 60 percent.
How it will impact you: Bhan said that the additional liquidity allows policyholders to withdraw the corpus from the pension fund for major life milestones, or even in case of treatment of critical illnesses. Further, at the time of policy maturity, policyholders can purchase an annuity from insurers other than from whom they have originally bought the pension plan. “Up to 50 percent of the corpus can be utilised to buy pension plans from insurers who guarantee better returns. This way, it will attract those customers who were previously averse to purchasing retirement and pension products due to low lump sum withdrawals, as compared to other pension options,” Bhan said.
- Surrender value norms revised to benefit policyholders
Surrender value norms are to become more favourable for policyholders. Surrender value is the amount you stand to get when you decide to make a premature exit from the plan, i.e. when you have decided to completely withdraw or terminate the policy before its maturity.
How it will impact you: Agarwal said, “In the case of a traditional life insurance policy, if for some reason the policyholder plans to terminate his policy, one doesn’t have to wait three years for their policy to acquire a guaranteed surrender value, instead one can now terminate the policy after the second year. This means, if a policy is terminated after 2 years from its commencement, then a fixed sum of up to ’30 percent of the total premiums paid less any survival benefits already paid’ will be given to the policyholder. Similarly, you get ’35 percent of the total premiums paid less any survival benefits already paid’ if you surrender the policy after 3 years, and for the 4th to 7th year it will increase to 50 percent.”
Further, if the policyholder surrenders the policy between the last two years before the policy matures, the regulator has asked the insurer to pay ’90 percent of the total premiums paid less any survival benefits already paid’ to the policyholder.
- Standardised partial withdrawal limit
You can now partially withdraw thrice during the entire policy term up to a maximum of 25 percent of the fund value at the time of withdrawal, linked to defined life events. These life events include partial withdrawal for higher education, children’s marriage or critical illness (self and spouse) or buying or construction of a residential property. However, no partial withdrawal will be allowed in case of ‘Group Unit Linked insurance plans’.
How it will impact you: Since the regulator has capped the partial withdrawal at thrice during the entire policy term, you will now be able to build more corpus for your retirement.
However, Naval Goel, CEO, PolicyX.com said that policyholders should not forget that partial withdrawals have a bearing on the insurance cover in the base policy as well. Partial withdrawals are paid by cancelling the units on the day the insurer receives the withdrawal request. “However, if the request is received after 3 pm, then the net asset value (NAV) of the next working day is taken while cancelling the units,” he said.