After introducing a new set of regulations for variable insurance products (VIPs), the Insurance Regulatory and Development Authority (Irda) has now provided more clarity on premium recognition for the product. For unit-linked VIPs, the premium will be recognised on the date of creation of units and for non-linked VIPs, it will be recognised on the date of receipt of premium.
The changes were done to ensure uniformity in adopting the principles for recognition of income by all insurers and also to align it with respect to the method used for the purpose of actuarial valuation of such products. Just like a unit-linked insurance plan, a VIP is a combination of investment and insurance and offers flexibility in the proportion of mortality and savings components.
All VIPs are treated on a par with Ulips, and they also follow the same commission package that applies to Ulips. The new norms on life insurance products, introduced last year, have reduced the commission on short-term policies and linked the quantity of commission to the premium-paying period for all products.
Analysts say VIPs provide consumers greater flexibility to change the mortality and savings proportions of their policies at different life stages. For investors, the main advantage is flexibility. The premium and the sum assured can be changed during the life of the policy. You can raise the premium amount with a rise in income, or decrease it if income drops. You can also decide the frequency of premium payment — yearly, quarterly or monthly. More importantly, even if you skip payment for a year, the policy will not be cancelled.
At present, there are two types of variable life insurance plans in the market — participating and non-participating. All participating plans offer a guaranteed return as mandated by the regulator. Non-participating plans offer an annual bonus at the end of each financial year in addition to guaranteed returns. The minimum sum assured as per the regulator's guidelines is R50,000 or 10 times the annualised premium, whichever is higher, for entry below 45 years.
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 company’s investment profile, and even the interest earned can vary from company to company.
Analysts recommend that in order to make VIPs more transparent, fund managers must mention the returns earned every year. They say that even under the new guidelines, agents’ commission and the expenses deducted are on the higher side compared with Ulips, where Irda has capped expenses at 3% of the premium for tenures less than 10 years and at 2.5% for products longer than 10 years.
All linked variable policies will have to offer death benefit, which is either the sum assured as agreed in the policy plus the balance in the policy account, or higher of the sum assured as agreed in the policy or the balance in the policy account. The minimum maturity will have to be at least equal to the balance in the policy account. Under Irda's regulations, every variable linked insurance policy will have a corresponding policy account whose balance shall depict the accrual to the policyholder. The policy account shall be credited with premium, net of charges. The guaranteed rate and variable interest rate will be applicable to the balance of the policy account.
The insurance company will have to send a statement of the policy account to the policyholder at least once a year, and it will have to issue it at the end of each financial year to the policyholder. It should have the break-up of the opening balance, premium received, deductions towards charges, minimum floor interest earned, variable interest earned, non-negative residual interest rate credited and closing balance in the manner prescribed by the regulator.