On July 8, 2019, IRDA came up with some new rules on Unit Linked (ULIPs) and non-linked life insurance plans. Before we proceed any further, take note that this is an informative article and it’s only meant for spreading awareness.
According to the revised rules, the chances are that insurance companies will soon launch new products in the insurance industry. Whereas the old products will slowly find their way out of the market. Moreover, there would be different sales pitches for old and new products. You will be shown that the best product in the market is being discontinued. And once the new products are launched, the same will be shown to you again.
As far as my point of view is concerned, I am totally against purchasing life insurance policies for investment purposes. You should only buy one plan from insurance companies and that is the term insurance plan. If you have not purchased one yet, go and get it online. Also, LIC is coming with a new Term Plan known as LIC Tech-Term Plan. You can read the review here.
Irrespective of what you say, people will continue to fall for the unrealistic insurance policies returns promised by agents. They will still purchase ULIPs, traditional and pension policies.
Now let’s discuss IRDA’s new rules one by one along with the possible impact that it could have on you.
Surrender Value in Traditional Insurance Policies – Endowment/Money Back
New Rule -Other than single premium products: The minimum guaranteed surrender value shall be the sum of guaranteed surrender value and the surrender value of the any subsisting bonus and any guaranteed additions already attached to the policy.
The guaranteed surrender value shall be at least:
- 30% of the total premiums paid less any survival benefits already paid, if surrendered during the second year of the policy, and
- 35% of the total premiums paid less any survival benefits already paid, if surrendered during third year of the policy.
- 50% of the total premiums paid less any survival benefits already paid, if surrendered between the fourth year and seventh year of the policy
Meaning – For the previous policies, the surrender value could be acquired only if a minimum of 2 premiums had been paid. Though there were few policies which could acquire surrender value in the 2nd year itself.
Now, it is compulsory to give surrender value after the 1st premium has been paid. In simple words, a customer can surrender the policy in the 2nd year itself and minimum 30% of the premiums paid back will be returned to the customer. The customer would also receive the surrender value of the guaranteed bonus which was promised at the beginning of the policy.
There is not much difference in the surrender value after the 2nd year – Previously, the minimum amount was 30% of the premium for surrendering after 2 years whereas now it is 35%.
I think this would only be applicable to new policies.
All the existing policies will have the same terms and conditions i.e. 30% surrender value after 2-year premium payment.
Minimum Death Benefit: For all the non-linked individual life insurance products, the minimum Sum Assured on death during the entire term of the policy shall not be less than 7 times the annualized premium, for limited or regular premium products, and 1.25 times the single premium for single premium products.
Meaning – If you’re unaware, the maturity proceeds are taxable in some insurance policies. The condition is that the sum assured should be less than 10 times of the premium.
For example – Suppose you’re paying a premium of 50,000 per annum. The sum assured is 7 times (Rs. 3.5 lakhs only). The maturity of this policy will be taxable.
I don’t think, insurance companies will launch endowment products where sum the assured is less than 10 times of premium. The reason is that most of the insurance policies are sold on the basis of tax-saving purposes.
Same goes for the Unit-linked policies, where the minimum sum assured should be 7 times of the premium.
Unit Linked Pension Product Partial Withdrawal
In case of Unit Linked pension products, partial withdrawal:
- can be made only after completion of lock-in period. ii) shall not exceed 25% of the fund value at the time of partial withdrawal.
- it can happen only three times during the entire term of the policy.
- it shall be allowed only against the stipulated reasons: (1) Higher education of children. (2) Marriage of children. (3) For the purchase or construction of residential house. (4) For treatment of critical illnesses of self or spouse.
Meaning – The lock-in period in ULIPs is 5 years. Previously, there was no facility of partial withdrawal in pension products. Though you had the option of partial withdrawals in other ULIPs.
Now, you can make partial withdrawals in ULIPs pension plans as well but only after the completion of 5 years. The amount would be limited to 25% of the total fund value against the stipulated reasons mentioned above.
At this point, you can buy riders in ULIPs but the charges would be deducted by the cancellation of Units. Now, the customers will get the option to pay an extra premium towards riders.
With the revised rules in place, companies will start launching new products very soon. There are high chances that your agent/relationship manager would lure you to purchase existing products. You would be told that the product is going to be discontinued in next 2-3 or 6 months.
You’d also come across deceptive wordings like this is the best product and it will close in a few months.
As of now, the only advice I have for you is to stay away.
Stay away from such insurance products for investment purposes or else you will end up losing on your hard-earned money.