On 8th July 2019, the Insurance Regulatory and Development Authority of India (IRDAI) issued guidelines for both unit-linked and non-linked insurance products with the proposition to make them more customer-centric. The issued notification broadly talks about the rules for pension products, traditional plans and Unit Linked Insurance Plans (ULIP) by easing the surrender and annuity process. The reason for the issuance was to improve the current product regulations in order to be in line with dynamic needs of the present and to ensure that insurers follow prudent practices to protect the interests of policyholders.
In order to implement it right on time, IRDAI has made it mandatory for all insurance companies to get these guidelines with effect from February 2020 superseding the earlier circulars on the subject. The move is a strong effort to increase transparency and curbing mis-selling of life insurance policies while also ensuring that policyholders are provided with all the correct information related to the product.
As per the rules, a policy lapses when the policyholder skips paying premium which is not just on the due date but even within the grace period. According to the new guidelines, IRDAI has asked the insurance companies to increase the revival period of non-linked policies to 5 years from the current 2 years. To comply with this provision, LIC of India has decided to increase the revival period of 32 of its products to 5 years and that of its ULIP plan, New Endowment Plus, to 3 years from the date of the first unpaid premium. This is the best change that has been brought keeping insured’s interest and their financial conditions.
There have also been some changes in the minimum sum assured of linked and non-linked products. For regular premium and limited premium paying policy, death benefit is reduced to seven times the annualised premiums, irrespective of your age when you purchase the policy. For single premium policy, the sum assured is 125% of single premium, again irrespective of your entry age. After its implementation, the policyholder will be able to invest in market more resulting in building higher corpus rather than getting deducted for the mortality charges. However, to avail tax benefit under section 80C, death benefit is still required to be 10 times of the annual premium. Also, the new regulations will now allow the insurers to charge an extra premium from policyholders who wish to buy riders with unit-linked insurance plans. Previously, insurers used to deduct units from ULIPs in case a policyholder buys riders with it.
People these days, while investing money in a specific product, invest with certain goals and tenure in mind. However, as they pass through different stages of life and experience different aspects, the goals tend to change. On traditional policy front, if for some reason the policyholder plans to discontinue his policy now, one doesn’t have to wait three years for their policy to acquire guaranteed surrender value. Which means, if a policy is discontinued after 2 years from its commencement, then a fixed sum of up to 30% will be given to the policyholder. The draft had proposed 35% payback if you surrender after 3 years and for the 4th to 7th year it will increase to 50%.
Moreover, rules have also been tweaked for premature part withdrawals. To make the life insurance pension products comparable with NPS, it will now allow partial withdrawal in case of linked pension plans in situations of critical illness, permanent disability because of an accident, or any other major health issue wherein the insured needs to withdraw some amount for survival.
Previously, one could draw only 1/3rd as the lump sum amount and 2/3rd of the amount was annuitized. But now, once the five-year lock-in ends, the maximum withdrawal allowed at maturity has been increased from one third to 60% of the corpus. Around 25 per cent of the insured value can also be withdrawn by the policyholders during an emergency situation that includes a serious illness, marriage and the education of their children. This is no doubt a very effective and efficient move as it will provide flexibility to customers to use their resources as whenever required.
IRDAI further underlines the reason for imposing these conditions by saying: Considering that life insurance is essentially a long-term financial instrument, a fair and transparent sales process with meaningful, timely and relevant disclosures is very important to ensure good customer outcomes and protect the interests of insuring public. It has also been made clear that existing products also will have to be modified within a reasonable period of time to comply with the new regulations. The move will prove very beneficial for the sector in the long run.