Sucheta Dalal :IRDA tightens ULIP norms says life cover is mandatory
Sucheta Dalal

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IRDA tightens ULIP norms, says life cover is mandatory   

May 5, 2010

 The Insurance Regulatory and Development Authority (IRDA) has announced some sweeping changes to be implemented in the structure of unit-linked insurance plans (ULIPs), amidst the raging battle with the Securities and Exchange Board of India (SEBI) over the regulatory purview concerning ULIPs.

In what may be seen as a desperate attempt on the part of IRDA to shore up its defences prior to its court battle with SEBI, the insurance regulator has made life cover mandatory with ULIPs (including pension/annuity products), along with a minimum sum assured payable on death. This norm will come into effect from 1 July 2010.

ULIPs, which provide health insurance cover, will be required to provide death benefits. Loans will not be granted under ULIPs. Partial withdrawal will now be allowed only after the fifth year instead of the earlier three-year lock-in period, except for pension/annuity products.

Partial withdrawal in ULIP annuity/pension products will not be allowed and the insurers will have to convert accumulated fund value into an annuity at maturity. “However, the insured will have the option to commute up to a maximum of one-third of the accumulated value as lump sum at the time of maturity. In the case of surrender, only up to a maximum of one-third of the surrender value could be availed in lump sum and the remaining amount must be used to purchase an annuity,” stated the IRDA circular.

An official from Reliance Life Insurance believes that this is a good move from the public’s perspective and it will have only a marginal impact on the company. Another official from Bajaj Allianz Life Insurance said that only time would tell how much impact this move would have on the industry.

Every top-up (ULIP) premium will have a lock-in period of three years from the date of payment of that top-up premium. However, no top-up will be allowed during the last three years of the contract.

The move comes at a time when the matter is due to be heard in a court.

“ULIPs as a product are not bad. The problem is because they are being sold as short-term products with a long-term insurance cover. If somebody is buying a ULIP and staying invested in it throughout the year, then it is a very good product. People pay compulsorily in an endowment policy. I would say that ULIPs should be made like an endowment policy. If there is a longer lock-in period, then it is always better for the client,” said Yogin M Sabnis, MD, VSK Financial Consultancy Services Pvt Ltd. 

 “Insurers will benefit if people stay invested for a long time. The actual allocation of funds starts after three years. Unless the commission is reduced, churning will not stop. Agents will still churn after five years. There are other investment avenues where initial charges are low. Why should one invest in a ULIP?” asked Sandeep Chimanlal Vasa, chartered financial planner (CFP), Total Wealth Management. Moneylife Digital Team



-- Sucheta Dalal