IRDA revamps ULIPs norms to reduce investor penalties

In a move to make unit-linked insurance policies (ULIPs) more investor-friendly, the Insurance Regulatory and Development Authority has come up with new regulations under which holders of such policies will get more of their money back if for any reason they are forced to surrender their policy early.

The new IRDA norms, issued late on Tuesday, provide a very strong incentive to insurers to ensure that policies do not lapse, by capping the surrender charge on policies that are returned after a year at 15 per cent. It comes down year after year, reducing to 5 per cent for the fourth year and 2.5 per cent for the fifth year.

This is a huge benefit for the customer as today there are several plans where the customer gets nothing if he or she surrenders a long-term policy after paying the first year's premium.

Apart from capping surrender charges, IRDA also proposed to standardise the revival period for polices that had lapsed.

In the draft guidelines, the regulator suggested the surrender charge during the first year of the policy be fixed at 12.5 per cent of the premium paid in case the policy term is less than 10 years. For longer duration policies, surrender charges are proposed to be capped at 15 per cent. At present, insurers levy up to 60 per cent surrender charge in the first year, which drops to 30 per cent in the second year.

''It (the draft circular) provides the ceiling on surrender charges instead of leaving it to the discretion of the insurers,'' IRDA said.