IRDA introduces new regulations on discontinued linked insurance policies

The IRDA has, vide its notification dated July 1, 2010, enacted the Insurance Regulatory and Development Authority (Treatment of Discontinued Linked Insurance Policies) Regulations, 2010 (“LP Regulations”). The LP Regulations, inter alia, provides for the manner in which a linked insurance policy can be discontinued by a policyholder.

The salient features of the LP Regulations are provided as under:

a) The grace period for payment of the premium for all types of linked insurance policies will be fifteen days where the policyholder pays the premium on a monthly basis, and thirty days in all other cases.

b) Upon the discontinuance of the policy, a policyholder will be entitled to either revive the policy or completely withdraw the policy that will deny the policyholder any risk cover.

c) Upon the discontinuation of the policy, the insurer shall send a notice, within a period of 15 days from the expiry of the grace period, to give an opportunity to the policyholder to revive the policy. The policyholder, accordingly, can revive the discontinued policy, upon which the risk cover along with investments made (less applicable charges) shall be continued.

d) If the policyholder decides to completely withdraw the policy, the proceeds of the discontinued policy (i.e. fund value less discontinuance charges) will be credited to the discontinued policy fund. Such fund will be refunded to the policyholder only after the completion of the lock-in period, i.e. 5 years. However, in case of pension and annuity linked products, the insurer shall not refund more than one-third of the proceeds of the discontinued policy while the remaining amount shall be used to purchase annuity.

e) In case of discontinuation of a policy, the insurer can impose discontinuation charges only to recover the expenses incurred towards procurement and administration of the policy. It is also the duty of the insurer to design the discontinuance charges in such a manner that it encourages the policyholder to continue with the contract for the full term. It is also the duty of the insurer to ensure that the charges levied on the date of discontinuance do not exceed the limits specified below:

Limits on Levy of the Discontinuance Charges

Where the policy is discontinued during the policy year	Maximum discontinuance charges for the policies having annualized premium up to Rs.25,000/-	Maximum discontinuance charges for the policies having annualized premium above Rs.25,000/-
1	Lower of 20% * (AP or FV) subject to a maximum of Rs. 3000	Lower of 6% * (AP or FV) subject to maximum of Rs. 6000/-
2	Lower of 15% * (AP or FV)subject to a maximum of Rs. 2000	Lower of 4% * (AP or FV) subject to maximum of RS. 5000/-
3	Lower of 10% * (AP or FV) subject to a maximum of Rs.1500	Lower of 3% * (AP or FV) subject to maximum of Rs.4000/-
4	Lower of 5% * (AP or FV) subject to a maximum of Rs.1000	Lower of 2% * (AP or FV) subject to maximum of Rs.2000/-
5 and onwards	NIL	NIL

AP - Annualised premium

FV - Fund value on the date of discontinuance

f) The LP Regulations further provide that no discontinuance charges can be imposed on single premium policies and on top ups.

The insurer shall send a statement of account to the policyholder on a half yearly basis in respect of every policy in force, including discontinued policies where the proceeds are yet to be paid. Such statement of account shall, inter alia, contain the details such as total premium paid by the policyholder, due date, investment pattern, fund value, and details of charges imposed.