IRDA increases lock-in period for ULIPs to 5 yrs

The much awaited guidelines for Unit Linked Insurance Plans or ULIPs are finally out. These guidelines come on the back of the ordinance that brought ULIPs under the jurisdiction of the insurance regulator Insurance Regulatory and Development Authority or IRDA, and put an end to the dispute between markets regulator SEBI and IRDA, reports CNBC-TV18’s Avni Raja.

The most important thing coming out of the guidelines is that the lock-in period for ULIPs have been increased from three to five years. This has largely been done because IRDA wants to ensure that ULIPs are treated as a long term insurance product and not as any short term product. All ULIPs, except pension, are annuity products and have to have either a mortality cover or a health cover.

Any top up on insurance premiums will be treated as a single premium, which means that every top up that one makes will have to have an additional insurance cover backing it as well.

As far as pension and annuity products are concerned, there will be no partial withdrawals allowed. However, these pension annuity products need not have either a life or a health cover but it compulsorily will have to be turned into an annuity on maturity.

Also, these pension annuity products will have to offer a minimum guarantee of 4.5% per annum or as the regulator suggests going forward. As far as loans are concerned, up to 40% of the NAV can be taken as a loan but it has to be an equity oriented ULIP where more than 60% is equity oriented.

The charge structure is a little complex as the insurer has to distribute the charges evenly across the entire tenure of the products. A lot of frontloading of charges has existed till now. But now that will no longer be the case and one will be able to frontload only to the extent of the first four years. After that the regulator has set out for each year how much the charge will be levied. For example for the fifth year it will be 4%, for the sixth year it will be 3.75% and so on. This will ensure that no consumer gets affected if they surrender the policy after the fifth year.

The new guidelines will be effective from the September 1 to give the companies enough time to adhere to them.

Source - http://www.moneycontrol.com/news/cnbc-tv18-comments/irda-increases-lock-in-period-for-ulips-to-5-yrs-_466745.html