A few weeks back IRDAI (Insurance Regulatory and Development Authority of India) issued a notification on new regulations for both ULIPs (unit-linked insurance plans) and traditional insurance policies. The new product regulation has made several changes to both linked and non-linked products. The regulation has provided policyholders with better propositions in terms of enhanced surrender value for non-linked products, among others. Also, policyholders who have been mis-sold a policy and are paying a high premium every year, according to the new regulations, they can decrease their premium up to 50 per cent for reduced benefit after the 5th year.

Aalok Bhan, Director and CMO, Max Life Insurance says, “This is a welcome move which shall provide enhanced flexibility to the policyholders and allow them to manage this risk and inconsistent portfolio in a better way.” The regulator has also reduced the minimum sum assured requirement for policyholders of all ages to 7 times the annual premium and have increased revival period from 2 years to 3 years for linked and 5 years for non-linked business. For the linked business, in case of non-payment of the premium post the expiry of the lock-in period, up to the revival period, policies will be treated as paid up.

The changes that have been brought to enhance flexibility for customers include;

  • Now policyholder’s has the option to reduce the premium by up to 50 per cent after 5 years,
  • Can make partial withdrawals for linked pension products,
  • The minimum sum assured on new ULIPs will be less than 10 times the premium
  • Increase in the commutation amount of matured pension amount from 33 per cent to 60 per cent,
  • Settlement options on maturity/death in ULIPs, along with the flexibility to switch amongst funds during the settlement period
  • Open market option for purchasing an annuity, up to 50 per cent of the investable corpus

How does the reduction in life cover impact policyholders?

Generally, it is mandated for insurance companies to offer sum assured 10 times the of premium on ULIPs, however recently, the ULIP Regulations, 2019, has brought it down to a cover of 7 times the premium. Hence, if you opt for ULIPs for good returns from the equity market you will have to watch out for life insurance cover.
Even though insurers can choose to offer a higher sum assured to the policyholder, but it is not mandatory, now only 7 times the premium is mandated. With this move of reducing the sum assured on ULIPs, experts suggest policyholders can fall short of life insurance cover. Policyholders might need to consider further enhancing risk protection through another policy. However, with these changes, the returns on your investment in the ULIPs can also go up. Mortality charge based on the sum assured in a policy, which is deducted from the premium that is invested, will reduce.
Also, note that the tax benefit will be applicable only if the sum assured is at least 10 times the premium. Policy’s with sum assured 7 times, will have to pay tax on the maturity amount. In the case of single premium ULIP, according to the new regulation, the minimum coverage will be 1.25 times the premium.

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What does the new Surrender benefit mean for you?

Normally, the guaranteed surrender value (GSV) on traditional life insurance policies was given only from the 3rd year. However, with the IRDAI’s Non-Linked Insurance Products Regulations, 2019, policyholder’s right from the second year itself can receive the benefit.
If surrendered during the second year of the policy, the guaranteed surrender value will be at least 30 per cent of the total premiums paid, minus survival benefits already paid, wherein you will lose around 70 per cent of the premium paid. In case the policy is surrendered during the 3rd year of the policy the guaranteed surrender value will be at least 35 per cent of the total premiums paid, minus the survival benefits if already paid. However, if surrendered during the last 2 years of the policy, the guaranteed surrender value increases to a minimum of 90 per cent of the total premiums paid

The changes brought in by the regulator on pension policies will also benefit policyholders. As of now, you could only withdraw as lump sum one-third of the total sum and the balance had to be converted into an annuity. However, with the new regulation, similar to NPS you can withdraw up to 60 per cent of the maturity amount. You can also invest at least 50 per cent of the amount in annuity schemes of other insurers. However, only one-third that is withdrawn will be exempted from tax.