The Insurance Regulatory and Development Authority (“IRDA”) vide its circular[1] dated June 28, 2010 (“Circular”) has specified certain elements to be incorporated in all Unit Linked Insurance Plans (“ULIPs”). The circular applies to ULIPs offered for sale to the public from September 1, 2010. IRDA has further issued a guidance note[2] dated June 28, 2010 on ‘recent regulatory changes related to ULIPs’ (“Guidance Note”).
Through the Circular and the Guidance Note, IRDA has carried out the following structural changes:
1. Lock-in period for all ULIPs has been increased from three years to five years. The lock-in applies to top-up premiums also. During the lock-in period any form of residuary payments on the policies which are lapsed/surrendered/discontinued has been prohibited. Such payments can now be made only after the expiry of the lock-in period. This stipulation will have the effect of making ULIPs long term financial instruments, which will basically provide risk protection.
2. All regular premium/limited premium ULIPs shall have uniform/level paying premiums. Any additional payments shall be treated as single premium for the purposes of insurance cover. Further, all limited premium ULIPs, other than single premium products, shall have premium paying term of at least 5 years.
3. Overall charges on ULIPs are mandated to be evenly distributed throughout the lock-in period, to ensure that high front ending of expenses is eliminated.
4. Further, all unit linked products, other than pension and annuity products shall provide a mortality cover or a health cover thereby increasing the risk cover component in such products.
(i) The minimum mortality cover should be as follows:
| Minimum Sum assured for age at entry of below 45 years | Minimum Sum assured for age at entry of 45 years and above |
| Single Premium (SP) contracts: 125 percent of single premium. Regular Premium (RP) including limited premium paying (LPP) contracts: 10 times the annualized premiums or (0.5 X T X annualized premium) whichever is higher. At no time the death benefit shall be less than 105 percent of the total premiums (including top-ups) paid. | Single Premium (SP) contracts: 110 percent of single premium Regular Premium (RP) including limited premium paying (LPP) contracts: 7 times the annualized premiums or (0.25 X T X annualized premium) whichever is higher. At no time the death benefit shall be less than 105 percent of the total premiums (including top-ups) paid. |
(In case of whole life contracts, term (T) shall be taken as 70 minus age at entry)
(ii) The minimum health cover per annum should be as follows:
| Minimum annual health cover for age at entry of below 45 years | Minimum annual health cover for age at entry of 45 years and above |
| Regular Premium (RP) contracts: 5 times the annualized premiums or Rs. 100,000 per annum whichever is higher. At no time the annual health cover shall be less than 105 percent of the total premiums paid. | Regular Premium (RP) contracts: 5times the annualized premiums or Rs. 75,000 per annum whichever is higher. At no time the annual health cover shall be less than 105 percent of the total premiums paid |
5. All top-up premiums paid during the currency of the contract, except for pension/annuity products, must have insurance cover treating them as single premium, as per above table.
6. All unit linked pension and annuity products shall offer a minimum guaranteed return of 4.5 per cent per annum or as specified by IRDA from time to time, on the maturity date. Further, mortality and/or health cover could be offered by the insurers along with the pension/annuity products as riders, giving enough flexibility for the prospective policyholders to select covers of their choice.
7. In case of the unit linked pension and annuity products, the circular bars any partial withdrawal during the accumulation phase and the insurer is required to convert the accumulated fund value into an annuity at the vesting date. However, the insured will have an option to commute up to a maximum of one-third of the accumulated value as lump sum at the time of vesting. In the case of surrender, only a maximum of one-third of the surrender value can be commuted after the lock-in period. The remaining amount must be used to purchase an annuity.
8. With a view to smoothen the cap on charges, the capping been rationalized to ensure that the difference in yield is capped from the 5th year onwards. This will not only reduce the overall charges on these products, but also smoothen the charge structure for the prospective policyholder. Therefore, after taking into account, the discontinuance/lapsation/surrender behavior of the policyholders following limits on the charges have been prescribed by IRDA starting from the 5th policy anniversary:
| Annualized Premiums Paid | Maximum reduction in yield (Difference between Gross and Net Yield (% pa)) |
| 5 | 4.00% |
| 6 | 3.75% |
| 7 | 3.50% |
| 8 | 3.30% |
| 9 | 3.15% |
| 10 | 3.00% |
| 11 and 12 | 2.75 % |
| 13 and 14 | 2.50 % |
| 15 and thereafter | 2.25 % |
9. The net reduction in yield for policies with term less than or equal to 10 years shall not be more than 3.00% at maturity and for policies with term above 10 years, the net reduction in yield at maturity cannot be more than 2.25%.
10. The maximum loan amount which can be sanctioned under any ULIP must not exceed 40% of the net asset value in those products, where equity accounts for more than 60% of the total share and must not exceed 50% of the net asset value of those products where debt instruments accounts for more than 60% of the total share.
Conclusion
The insurance cover on ULIPs, which has gone up to 10 times of the first-year premium compared to existing five times is a welcome move for the prospective policyholders. Further, the provision that provides for the guaranteed return for all unit linked pension/annuity products will protect the life time savings for the pensioners, from any adverse fluctuations at the time of maturity. However, in cases where the insurance companies are obliged to provide assured returns, they may be under pressure to divert bulk of their unit linked premiums towards debt and other secured instruments, which may consequently limit the equity linked upside for the unit holders.
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