|IRDA's new guidelines are aimed at protecting the interests of ULIP policyholders and enabling the customer to take an informed decision, say C L Baradhwaj, general manager, legal, MetLife Insurance.|
The Insurance Regulatory and Development Authority (IRDA) recently introduced its much-awaited guidelines to govern unit-linked insurance policies (ULIPs), which are among the most popular class of life insurance policies sold in the country today. Till the privatisation of the insurance industry around the end of the century, only the Unit Trust of India (UTI) sold unit-linked insurance plans, apart from the Dhanaraksha Plan of the LIC Mutual Fund.
ULIPs are life insurance policies where the insurance cover is bundled with an investment benefit under a single contract; the customer gets insurance cover as well as investment returns based on market performance. As in mutual funds, there are different options like predominantly equity-oriented investments, pure debt investments, government securities investments, etc, which the customer can choose, depending on his or her risk appetite. The most important point is that the risk under ULIPs is borne by the policyholder.
Though unit-linked insurance schemes have proved to be incredibly popular, there were no regulations and there were complaints that some insurance companies were taking unfair advantage of this, selling ULIP policies that were little more than thinly disguised mutual funds. IRDA's new regulations are aimed at ensuring that the customer gets a fair deal, at enhancing transparency, providing a better understanding of the product design and assuring a reasonable amount of insurance cover in ULIPs, consistent with the long-term nature of life insurance products.
The primary advantage of ULIPs is that the customer gets the advantages of both insurance and mutual fund investment in a single contract. An in-house team invests and manages the premiums and gets the customer a return. ULIPs also offer tax deduction of up to Rs100,000 from the gross total income under Section 80C of the Income Tax Act, 1961. Returns from ULIPs are exempt from tax, subject to the conditions under Section 10(10D). The downside is that, generally, there are limited guarantees, and market risks are passed on to the customer completely. Returns could be lucrative if the market is upbeat, but the unit value could decline if the market goes down.
The new provisions
IRDA has prescribed a minimum sum assured equal to 50 per cent of the total annualised premium during the entire policy term or five times the annualised premium, whichever is higher. This regulation is aimed at maintaining the basic characteristic of a life insurance policy, where life cover should be the primary benefit. Till the policyholder turns 60 years old, the sum assured cannot be reduced by partial withdrawals. This is aimed at protecting the life insurance cover.
Premium Holiday: If the policyholder stops paying premium instalments after paying premiums for three years, the risk premiums and the applicable charges can be adjusted from the balance in the account value, till such time as the balance in the account reduces to one year's premium. This would help policyholders who are unable to pay premiums owing to a temporary disruption in income because of change in employment, or any other sudden drop in income. The premium holiday option ensures continued insurance protection by transferring the risk premium and charges due from the account value, which is built up over a period. But the policy would lapse and this benefit would not be available if premium payments are stopped within three years.
Top-up Premiums: Top up premiums are irregular dump-in amounts allowed in a ULIP. Up to now, there were no restrictions; it was possible, for example, to dump in Rs1 crore in a ULIP and invest the entire amount in the market. But this vitiates the basic characteristic of the policy by making the insurance component insignificant. To plug this loophole, IRDA has prescribed that a sum assured must back any dump-in that exceeds 25 per cent of normal premium, which will be constant throughout the term of the policy. Any appropriation towards a dump-in can take place only if the normal premiums are paid.
Withdrawals from ULIPs: Earlier, withdrawals from ULIPs were possible even within a year of issue. Depending on the option selected, they were reduced from the sum assured, resulting in dilution of death benefits to the nominees. Now, withdrawals will be allowed only after three years. The new guidelines provide that except for withdrawals made during the two years immediately preceding death, no other withdrawals can be reduced from the sum assured. But once the customer is past the age of 60, all withdrawals can be reduced from the sum assured.
Lock-in period: A top-up premium cannot be withdrawn for three years. This places ULIPs on par with mutual fund contributions under Section 80C of the Income Tax Act, 1961. The only relaxation in this condition is on withdrawal of top-up premiums made during the last three years of the policy contract.
Settlement options: The policyholder has settlement options, to receive the policy benefits in various forms, rather than a lump sum. For example, the company can give the policyholder an option to receive the maturity benefit in the form of a monthly pension. IRDA has restricted such extended periods of settlement to five years from the date of maturity. The company should also make clear the inherent risk involved in extended periods of settlement.
Date of unitisation: The invest-able portion of the contributions (after deducting risk premium, charges, etc) is invested based on net asset value (which reflects the average market value of the invested contributions). So far, insurance companies were unitising on the date of placing of the policy, which could be much later than the date on which the customer gave the cheque towards the first premium, renewal premium or dump-in premium. This often resulted in loss to policyholders, as the market moved up between the date of receipt of the cheque and the date of placing the policy. To resolve this anomaly, the IRDA has prescribed the following guidelines:
Contributions by local cheque / DD: If the payment is received up to 4.15 pm, payable at par at the place of receipt, the same day's closing NAV will be applied. After 4.15 pm, the next day's closing NAV is applicable.
Contributions by outstation cheque: The closing NAV on the date of realisation of the outstation cheque is applicable.
This provision ensures that the company banks the cheques on time. The company will make good any loss on account of delays on its part. This rule is applicable for redemptions too.
Charges: Charges are costs appropriated by insurance companies from ULIP premiums. The IRDA has listed the charges that insurance companies can levy on policyholders, as well as laid out the standard definitions for use in policy contracts. This is aimed at clarity and to enable customers to understand and compare costs between different insurance companies.
Statement of Account: A statement of account, which forms part of the policy document, must be issued at the end of each policy year and also when a transaction takes place, giving complete information on the nature of the transaction (investment / switch over, etc), the NAV on the date of transaction, number of units before and after the transaction, etc. The annual statement must give the number of units in the account and the NAV on the date of the statement, besides other relevant information.
Market Conduct: There is an inherent risk in investing in ULIPs, as the performance of the funds underlying the ULIPs governs their returns. To address these risks, the IRDA has authorised the Life Insurance Council to formulate a Code of Conduct for sale of ULIPs. This includes mandatory training for agents before they are authorised to sell ULIPs, documentation to enable the customer to understand and acknowledge the risk involved in buying ULIPs, a code of conduct for their sale, educating policyholders on risk factors, terminology, charges, etc.
Disclosure norms: To prevent misleading information, the IRDA has prescribed norms for mandatory disclosures. All promotional materials must specify all fund options (like equity funds, debt funds, balanced funds, etc), the minimum and maximum percentage of investments in fund options, all charges with limits, and the risk profile. All promotional materials and policy documents must carry a clear statement that the investment risk is borne solely by the policyholder. The size of the fonts used in disclosures must be the same as that used for other purposes in promotional materials and policy documents.
All advertisements for ULIPs must clearly address the question of risk and distinguish ULIPs from conventional life insurance products. They must disclose all charges and guarantees, if any, and include a statement that the fund name and the company name do not indicate the performance of the fund. Advertisements must be simple, understandable to policyholders and avoid legal and financial jargon, to avoid misleading sales.
Past performance can be given only on completion of one calendar year from the introduction of the fund. Emphasis on past performance should be minimal. Under no circumstances can there be any justification for projecting or suggesting future performance based on past performance; there should be a clear-cut statement that past performance is no indication of future performance.