Changes in rules and regulations of ULIPs proposed by IRDA | Comparing new policies and existing policies

September 21st, 2010| Education.

Changes in rules and regulations of ULIPs proposed by IRDA | Comparing new policies and existing policies

ULIPs

Economic reforms change the rules and regulations which are being implemented from time to time.  Strong policies can be formulated only then.  Schemes which are being executed will be beneficial.  Teething problems are common for any new investment scheme in the primary stage, as it gives problems to the investor for some time.  New rules and regulations are introduced in course of time to secure the advantages of the investors.  For example, to see that the commission collected from the investors who invest in stock market is fixed, or regulating telecom charges, cancelling the fees for investors in mutual funds etc.  There was a storm against these changes in the beginning, but various organizations have to change according to the new rules and regulations.  Most of these changes are beneficial to the people.  But changes take long time to come and accepted by all.

Coming to ULIPs from the time these are introduced there were one or other controversy about them.  Individual economic planning experts also expressed many doubts about them.  Some people have said that these are simply waste of money.  But the attraction of ULIPs has not diminished.  ULIPs were the reason for a war between two regulatory organizations.  This is the controversy between SEBI (Securities and Exchange Board of India) and IRDA (Insurance Regulation and Development Authority).  This has changed the future of the ULIPs.  IRDA has won in this controversy and kept the ULIPs under its control.  IRDA had made the rules and regulations strict.  All the ULIPs come with this rules from 1st of September.

Main changes in New ULIP rules and regulations

  • The minimum duration of the policy is increase from 3 years to 5 years.  That means premium has to be paid compulsorily for 5 years.  This is called the lock-in period.
  • The charges for the policies are divided equally for these 5 years.
  • The amount of insurance should be at least 10 times of the premium.  This was only 5 times till recently.  For people who are 45 years of age, this should be 7 times the premium.  For single premium policies the amount of insurance should be 1.25 times the premium and for 45 year old persons it is 1.1 times.
  • No indirect with drawls are allowed in pension schemes.  This should give an annual income of 4.5% or as directed by IRDA.

Generally insurance policies are not popular in rural areas.  But this is different for ULIPs. ULIPs have penetrated in to rural areas with slogans like pay the amount for three years and the money will be doubled.  Since the commissions are higher, agents were interested to sell these ULIPs.  This is called ‘Mis-selling’  in insurance terminology.  As a result many people had taken these policies.  New rules give a little chance for ‘mis-selling’.

Till recently, insurance sum was assured 5 times for the annual premium paid.  The new rule is that it should be at least 10 times the annual premium.  This is beneficial for those who have not taken the insurance policy.  But for those who have already taken policies may not benefit from this.  Since the insurance coverage is increased, the amount allotted for risk cover is also increases.  Thereby, the allotment for investments decreases.  That means the chances of growth in investments.

Availing loans

All the traditional endowment policies offer the convenience of taking loans. Earlier, only few ULIPs allowed taking loans.  With the new rules, equity dependent policies can be put as security and 40% of the NAV can be taken as a loan.  Money can be obtained without cancelling the policy.  The number of people who cancel the policies decreases with this.  And the policies will continue for the full period and long time savings benefits are possible.

Presently ULIPs are in the first place of savings schemes. To know the new policies being introduced with the new rules, another one week of waiting is compulsory.

Existing policies

Old rules apply for those people who have taken policies till 31st August.  If the policy is already taken, the time duration of 3 years will be applicable to the policy.  From September, insurance companies cannot sell the old policies.  So, insurance companies are going to introduce new policies.  IRDA rules are applicable to these policies.

This has to be decided whether to pay the premium as it is or to hand over the old policy and take the new policies.  If the duration of the old policy has completed three year there will be surrender value for the policies.  But the surrender charges are also to be taken into consideration.  Some policies collect surrender charges for 10 years.  So, carefully study the policy papers.  Or consult the service center of the insurance company.  Compare the old policies with the new ones and then decide which the better is.

Who is to be benefited?

All the proposed changes are designed to benefit the ULIP policy holders.  Mis-selling may not be possible with these policies which give long term investment benefits.  Waiting for five years may be a problem for the policy holders.  But the burden of charges is a bit less now.  Existing policies use to collect charges up to 40% in the first year.  So amount invested in the first year was decreased.  Now since the charges are equally divided for the five years, the amount of investment is increased.

There are some changes, in the rules which allot 100% of the investments to equities.  Insurance companies have to invest in debt schemes and government bonds because they have to give security to the insurance policies.   There may be less income because of this but the risk of loss is decreased for the policy holder.

Direct Tax Code is coming in to implementation from 1st April, 2011.  This is not applicable to the policies which are taken before the implementation of new tax code.

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