VIP makeover

Written by feBureau | Updated: Oct 30 2012, 07:29am hrs
Irda has sought to make the rules governing variable insurance products more transparent. Should you invest in them

The Insurance Regulatory and Development Authority (Irda) has provided some clarity on variable linked products. An exposure draft on standardised linked insurance products has clarified that their benefits should be partially or wholly dependent on the performance of an approved external index to which they will be linked.

The variable insurance products (VIP) will be required to have a guaranteed interest rate, which will be referred to as a minimum floor rate and also variable interest rates, which will be directly linked to the performance of an approved external index or an external benchmark.

The minimum floor rate, as approved in the file and use clearance procedure, will give guarantee for the entire term and be calculated on the balance of the policy account at the beginning of the year and, consequently, at a frequency not less than quarterly.

The exposure draft has also clarified that at each point in time during the period where the policy is in force, after the minimum floor rate is credited, the variable interest rate as applicable in accordance with the external index or external benchmark, as approved in the file and use clearance accorded by the authority shall be credited to the balance of the policy account value.

In fact, in 2010, Irda imposed a temporary ban on VIPs, which were then called universal life products, because of high agent commission and low transparency. Later, the regulator came out with new guidelines where the expenses were capped at 27.5% of the first-year premium, 7.5% of the second- and third-year premium and 5% for the fourth and subsequent premium. Irda has also made surrender benefits more investor-friendly. If the policy is surrendered in the first, second or third year, the amount would be paid after the lock-in ends. If the surrender takes place during the fourth or fifth year, the policyholder gets 98% of the balance in the account, which will be payable immediately on surrender.

The minimum duration of policy and premium payment must be five years and all VIPs must have a lock-in period of three years. The policy account must be credited with premium net of all charges, and a statement of policy account sent to the policyholder at least once a year. No partial withdrawals are allowed, but the investor is eligible for a loan of not more than 60% of the balance in the policy.

The recent exposure draft has also clarified that for the policy account value, every variable insurance policy shall have a corresponding policy account whose balance shall depict the accrual to the policyholder.

The policy account shall be credited with premium net of all charges. The guaranteed rate and variable interest rate shall be applicable to the balance of the policy account, the exposure draft says.

Also, insurers will have to give a shadow policy account value on a daily basis, which will be computed on the actual accruals of all income elements like premiums, income from investments, etc, and all actual outgo like expenses, etc, to calculate the reduction in yields.

Analysts say the norms, if implemented, will bring in clarity on VIPs and policyholders will have a new product category to look at insurance and investments.

For investors, the main advantage in VIPs is flexibility. The premium and the sum assured can be changed during the life of the policy. One can even raise the premium amount with rise in income or decrease it if income drops and decide the frequency of premium payment yearly, quarterly or even monthly. More importantly, even if one skips payment for a year, the policy will not be cancelled. However, analysts say too much flexibility may not be a good idea. Unaware of the long-term impact, policyholders may pay too little premium, leading to insufficient accumulation of funds.

The investment process of VIPs will be more like Ulips, where after deduction of mortality charges, the amount will be invested in equities and bonds. But unlike Ulips, where the investor knows the value of the fund, there will be no unitisation of funds in VIPs.

In other words, VIPs work more like traditional endowment plans, where the investor has no idea of the investment profile. The cash value of VIPs will fluctuate according to the performance of the insurance companys investment profile and even the interest earned can vary from the company to the company.

On investment, the exposure draft has clarified that the insurer will have to keep separate account of all receipts and payments. The insurer will have to earmark assets for each product separately and the net asset value of each of the product will have to be disclosed on a daily basis on the website of the insurer through a specifically assigned identification number.

Also, the insurer will have to send a statement of policy account to policyholders at least once a year.

* The main advantage in VIPs is flexibility. The premium and the sum assured can be changed during the life of the policy. One can even raise the premium amount with rise in income or decrease it if income drops and decide the frequency of premium payment yearly, quarterly or even monthly.

* Even if one skips payment for a year, the policy will not be cancelled.

* Analysts say too much flexibility may not be a good idea. Unaware of the long-term impact, policyholders may pay too little premium, leading to insufficient accumulation of funds

* The investment process of VIPs will be more like Ulips, where after deduction of mortality charges, the amount will be invested in equities and bonds. But unlike Ulips, where the investor knows the value of the fund, there will be no unitisation of funds in VIPs

* VIPs work more like traditional endowment plans, where the investor has no idea of the investment profile. The cash value of VIPs will fluctuate according to the performance of the insurance companys investment profile and even the interest earned can vary from the company to the company

* The insurer will have to keep separate account of all receipts and payments

* The insurer will have to earmark assets for each product separately and the net asset value of each of the product will have to be disclosed on a daily basis on the website of the insurer through a specifically assigned identification number

* The insurer will have to send a statement of policy account to policyholders at least once a year