Ulips will now become more of an insurance product and less of an investment scheme following a change in regulatory norms proposed by the Insurance Regulatory and Development Authority (IRDA) today.
The regulator has tightened its rules for unit-linked insurance plans (Ulips) by increasing the lock-in period to five years from three years; spreading out the overall charges evenly over the lock-in period and thereby reducing the high commissions paid to agents in the first year; and hiking the minimum sum assured to 10 times the annualised premium as against five times now.
According to a circular issued by the regulator today, all Ulips sold after September 1 must comply with the changed norms.
Ulips will have a lock-in period of five years, and if a policy is surrendered or lapses because of the non-payment of premium during the lock-in period, the residuary payment will be paid only after five years from the commencement of the policy.
The high, front-ended charges in Ulips, particularly in the initial years, will go.
The regulator said, “Insurers will now distribute the overall charges in Ulips in an even fashion during the lock-in period. Charges on Ulips are mandated to be evenly distributed during the lock in period to ensure that high front ending of expenses is eliminated,” the IRDA circular stated.
Following this, insurance agents will no longer get a commission as high as 40 per cent in the first year from an Ulip.
The regulator has also increased the minimum sum assured in case of an Ulip with a regular premium payment option to 10 times the annualised premium from five times at present.
The sum assured has been increased to 10 times in cases where the policyholder is below 45 years of age. It will be seven times the annualised premium for policyholders who are aged 45 years or above.
An increase in sum assured means a larger amount of the premium will be deducted towards mortality charges, and this will lower the allocation of premium to the investment fund.
In other words, Ulips will yield lower returns to policyholders.
In single premium policies, the minimum sum assured is 1.25 times the single premium for policyholders aged below 45 years and 1.10 times for policyholders who are 45 years or more.
