In traditional plans, the product design of traditional plans would remain almost the same. These plans would continue to come in two variants — participating and non-participating plans. For participating polices, the bonus is linked to the performance of the fund and is not declared or guaranteed before. But the bonus once announced becomes a guarantee. It (also called reversionary bonus) is usually paid in the case of death of the policyholder or maturity benefit.
In non-participating policies, the return on the policy is disclosed in the beginning of the policy itself. In both cases, a policyholder should calculate the net return to assess the total costs. New traditional products will have a higher death cover. For regular premium policies, the cover will be 10 times the annualised premium paid for those below 45 and seven times for others. The minimum death benefit in the case of traditional plan is at least the amount of sum assured and the additional benefits, if any.
Irda guidelines say that VIPs should guarantee a certain minimum rate of return, also called the floor rate, at the beginning. Further, additional benefits could either be pegged to an index, declared upfront, or come in the form of periodic bonuses which will be guaranteed once declared. As in the case of ULIPs, VIPs will have to conform to cost ceilings. This essentially means the reduction in yield will not be more than 4 percentage points in the fifth year, coming down to a difference of 2.25 per cent from the 15th year onwards.
On ULIPs, Irda says life insurers will now have to inform policyholders of the reduction in yield of their ULIPs on a monthly basis.
The reduction in yield — difference between gross and net yields — refers to the lowering of investment growth within a fund due to various charges. ULIPS had undergone major changes two years ago.
The new guidelines have also reduced commissions on short-term policies and linked the quantity of commissions to the premium paying period for all products.
As a result, agents of single premium non-pension products will receive remuneration of up to 2 per cent of the premium paid. In the case of regular premium insurance policies, a policy with a premium paying term of five years will pay up to 15 per cent in the first year, 7.5 per cent in the second and third year and 5