IRDA''s ULIP guidelines will protect policyholders

15 May 2006

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.