ULIPs Reformation

IRDA Initiates ULIPs Reformation To Meet Investor’s Needs

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The Insurance Regulatory and Development Authority (IRDA) is stiffening the regulations for Unit Linked Insurance Plans (ULIPs) with its intention to retain the investment component of debt/equity option in a product’s lifecycle, instead of a stipulated time period.

The IRDA had previously advised that life insurance products should incorporate a saving element, such as, the consistent gross yield of 4% per annum attached to a bank linked savings account. Similarly, the expected maturity in linked insurance products should be minimal 90% of the total premium paid excluding the service tax.

Industry experts believe that due to the desired fund value of 90% at maturity for the premiums paid, IRDA is making it difficult to write ULIPs for older age group. For people above the age of 55 years where the mortality charge is high, the effect on the yield could go beyond 4%. This is an outright discouragement on ULIP investments for the retired investors.

Another private insurance company alleges that IRDA fund option is not independent of the product and does not favor closed-ended insurance schemes. The government watchdog intends to further reform the ULIPs for safeguarding the investors’ interest, with the view that IRDA cannot withdraw the fund options, even when the stock market corrects sharply.

The reforms in ULIPs has certainly improved the investors interest in 2014, with 33% increase in the premiums, raising the collected premium sums to INR 1,625 crore during the months of April-June as compared to a year-ago period.

The BSE Sensex index advanced to 26% in 2014 with the formation of a stable government augmenting economic reforms. Moreover, the private insurance companies are riding on the wave of bullish stock market to monetize the investments. Most insurance companies have already filed the online ULIPs schemes with IRDA.

The IRDA has instructed insurance companies to evaluate the pros and cons of the reformed ULIP schemes at each phase of execution to ensure the new, proposed featuresmeets the investor’s wealth accumulation goals, and will not claim any possibility for mis-selling.

The ULIP has undergone a revamp with the IRDA, specifying the minimum risk cover and the cap on the discontinuance charge. The maximum yield reduction at maturity is the difference between the gross and the net yields. Subsequently, the policies with a tenure of 10 years or less is capped at 3%, where as plans exceeding the 10 years time frame cannot exceed 2.25% in total charges.

Consequently, the internal rate of return (IRR) on ULIPs must not be lower than 7.75% yield. Additionally, IRDA has mandated an upsurge in the lock-in period, raising the bar from 3 years to 5 years, and thus guaranteeing that ULIP policies will have a long-term orientation.

 (Source: This article has been adapted from the article "IRDA moves to reform Ulip to stem mis-selling and meet needs of users" that appeared on October 29, 2014  ineconomictimes.indiatimes.com)