Index-linked Insurance Plan

With a plethora of products available in the market for sure we somewhat are split for choices. Having choices is a good option, however, sometimes we often get confused and not enlightened. There is also a perception that the new product will offer better benefits offered at a nominal cost comparatively. This leads to buying the product, which does not serve or desire intent. More than that, we spend the hard-earned money on something, which doesn’t match our requirements.

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The same applies to the financial products within the insurance sector. One of the most crucial aspects while buying any type of insurance policy is to assess the requirements, understand the risk-profile and then choose the policy that fulfils respectively.

Let us discuss one such new product in this category that is the ‘Index-linked insurance plan’, which will hit the market soon.

The Insurance Regulatory and Development Authority has recently revamped the product design draft directives for traditional products. With this revision, the life insurance business has a new product that is known as Index-linked insurance plan. As most of you are well aware that currently, the life insurance sector offers two categories of products namely Unite Linked Insurance Plan (ULIP) and Traditional plans.

What is an Index-linked Insurance Policy?

As the name suggests, the index-linked insurance plan is one of those insurance products wherein the returns are linked to the benchmark indices.

The index-linked insurance plan could be linked to the ten-year equity indices, for instance, Nifty or Sensex and the government bonds. When it comes to government bonds it is less risky and those that are linked to the equity-based indices mostly in returns have fluctuations on the premise of the performance of the stock market.

Now, let us try to understand the index-linked insurance policy in detail.

Why Index-linked Insurance Plan?

Earlier, the ILIP’s were available when the policyholder had guaranteed value. It operated much like a bank account in the past wherein every policyholder had a different managed account.

The charges within the plan were also implicit throughout the policy period. As per the directions of the IRDA, it will not allow the insurance companies to sell the index-linked products. Moreover, a working group is examining the different aspects of index-linked products. This plan will be offered as the pension plan product. Besides, such a plan is less risky and it will be benchmarked that permits the insured to receive a guaranteed value.

What are the Duties of the Working Group?

Listed below are the duties of the working group:

  • It will examine the need for index-linked insurance products in the nation.
  • It will let know in regards to the index-linked products accessible for sale.
  • It will study the practices of jurisdictions in regards to the index-related product.
  • It will provide recommendations that are pricing and product structure.
  • As per the requirements, it will invite experts externally for meetings
  • The working group needs to submit the report within two months right from the order date.

What is the Structure of the Index-linked Insurance Plan?

The index-linked insurance plan provides a lock-in period of five years. When it comes to paying the index-linked insurance plan premium it will be the equivalent as of a regular premium plan until the single premium or the policy tenure.

Most importantly, the index-linked insurance plan will not be sold with any other products of finance but as an unbundled product it will be promoted. There are insurance products in the market that are bundled with products such as air tickets for online booking, home/ personal loans, credit cards, consumer durables, and so forth.

The Cost Structure and the Returns

The Insurance Regulatory and Development Authority has recommended levying the mortality that is the risk cover charge explicitly. When it comes to the withdrawal charge or the surrender charge then will be implicit throughout the policy term. The mortality charges deducted will be shown on the account.

The index-linked insurance plan returns are likely to be benchmarked till an index that permits the policyholder to obtain the guaranteed value. The Insurance Regulatory and Development Authority will approve the benchmark index. The index-linked insurance plan could be provided as a pension product and should also provide non-negative positive returns. Moreover, even when it is provided as the pension product it is important to conform to the extend pension directives, for instance, the guarantee of returns minimum throughout the term of the policy, regardless of the index performance that is the non-negative positive return.

How Will Index-Linked Insurance Policy Benefit?

In the recent two to three years, the investment sector has witnessed returns from equity funds and the ULIP’s have been following the benchmark returns. It was so because of the narrow rally in the previous three years wherein only a handful of eight to ten stocks could drive the Nifty.

 As the market of India matures, more of passive products will be required and the fund managers will slightly find it difficult when it will come to beating the benchmark. It is here that the ILIP will fulfil the intent provided that passive funds globally are pocket-friendly when compared to active funds. It is expected that the ILIP charge will be low when compared to the traditional plans.

How Will an Index-linked Insurance Plan Operate?

When it comes to operating the ILIP, it will somewhat operate just like a bank account wherein every policyholder will have managed account separately as per the regulations of the draft.

This account value will then reflect the paid premium by the policyholder as well as the gained interest from the specific index of that the fund is essentially linked. The insurance companies are expected to send the policy account's statement to the policyholder towards the end of each period of reporting. The minimum death benefit within the new plan is going to be ten times of the life cover or the sum assured.

What Are Surrender Charges?

When the policy is discontinued and is unrevived during the initial three years, then the surrender value is the policy account value towards the culmination of the lock-in term that is less the pertinent surrender charge and that will be paid at the lock-in period’s end.

When the policy is surrendered after the initial three years, then the surrender value is going to be the policy account value towards the culmination of the lock-in period or the surrender’s date, whatever is later.

Is an ILIP Different From ULIP?

Indeed, ILIP is different from the Unit Linked Insurance Plan as it permits the policyholders to direct the part of the premium into various sorts of funds, for instance, hybrid, equity, money market, debt, and so forth.

When it comes to a ULIP the returns are upon the premise of the type of chosen fund. The ILIP’s might generally provide the non-negative positive returns.

When it comes to buying a new product, make sure that you are well versed with the product and understand your requirements and risk appetite.

Moreover, never intermingle your insurance needs with the investment requirements. Take an in-depth knowledge of the index-linked insurance plan and then make the most from it.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
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