IRDA plugs another loophole, allows universal life with riders

MUMBAI: The insurance regulator has allowed insurance companies to once again sell universal life plans on the basis of new guidelines, which plugged loopholes used by insurers to indulge in regulatory arbitrage. The new guidelines require insurers to offer a guaranteed return if the policy terms do not entitle the insured to receive a bonus.

Under the new guidelines, universal life plans have to be called 'variable' insurance policies. In case of life ULIPs, the regulator has imposed a cap on charges and the minimum surrender value the insured is entitled to.

If the policy is surrendered in the first three years, the policyholder is entitled to receive the balance in the policy account as on the date of the surrender which will be paid out after the lock-in period. If the surrender takes place during the fourth or fifth policy year, the policyholder is eligible for 98% of the policy balance available in his or her account. This amount is payable immediately on surrender. If a policyholder surrenders after the fifth year, the balance in the policy account has to be paid out immediately.

Similarly, the maximum expenses that can be charged to the premium paid by the policyholder in the first year has been capped at 27.5% of the first-year premium. For the second and third-year premium, the cap is 7.5% and 5% on subsequent years. If the insured decides to increase his contribution through a one-time top-up , the company can deduct at most 3% from the top-up by way of charges. New norms also require that death benefit equals the guaranteed sum assured, plus the balance in the policy account. If the insured survives until the policy matures, he will get whatever the balance is under the policy account, plus any terminal bonus.

A few months ago, the regulator cracked down on unit-linked insurance plans with new guidelines which forced insurers to return to policyholders with most of their premium, even if they made an early exit. It also compelled insurers to offer a minimum level of protection so that ULIPs are not positioned as mutual funds. The new rules forced insurers to reduce commissions and also required them to lower the expenses charged to the policyholders' account. To improve their bottom line, many insurance companies started pushing variable life plans, which were not subject to the ULIP regulations on commissions and charges.

According to IRDA, the design innovations in variable life products provide consumers greater flexibility to change the mortality and savings proportions of their insurance policies as individual life stage needs changes. "These new variations of traditional products are variously termed 'Universal Life' or 'Variable Life' policies and these products have gained a substantial share in the market, particularly in the developed markets, where they first evolved. It is clear that their popularity is caused by the greater flexibility, transparency and lower business strain, compared to non-linked conventional type products, which provide better returns," the regulator said.