The Insurance Regulatory and Development Authority of India (IRDAI) has amended certain changes in policies governing unit-linked insurance plans (Ulips) and traditional life insurance policies. The new guidelines will be effective from 1 February 2020.
Also Read: Individual Life Insurance Business Faces Slowdown in September 2019
What are the new guidelines?
Here is a list of the policy changes that are effective from 1 February 2020:
-
- Longer Wait Period for Policy Revival:
IRDAI has instructed insurers to extend the time period allowed to revive insurance policies. Currently, the time period allowed to revive Ulips is two years from the date of the first unpaid premium. According to the latest guidelines, the time period allowed will be three years for Ulips and five years for non-linked insurance products. Impact: The change is convenient for the policyholders as it is considerate of their financial conditions. If you are unable to pay premiums and are about to discontinue the policy, you will now receive another year’s time to revive the policy. - Sum Assured to Buy Ulips Reduced to 7 Times the Premium Paid:
According to the latest guidelines, the terms and conditions to buy Ulips will be made uniform across all age groups. The minimum sum assured for a policyholder below 45 years of age will be reduced from ten times to seven times the annual premium paid. At present, only policyholders above 45 years of age could buy Ulips with sum assured less than ten times the annual premium.
Impact: A reduced sum assured means better returns as a smaller amount will be deducted as mortality charges. However, tax benefits can be availed only when the sum assured is 10 times or more the annual premium paid. - Optional Maturity Proceeds on Pension Plans:
The mandatory guarantee on pension plans will now be optional for the insurer. So far, the insurer had to guarantee maturity proceeds. That is the insurer had to invest in debt instruments to provide guaranteed maturity benefits with a lower potential return-on-investment. According to the new policy, the policyholder can choose if they want assured returns.
Impact: The new policy provides the policyholder with an option to choose higher returns with no guarantee option; he can also ask for increased equity exposure in the policy. ‘No guarantee’ option specifies that there is no guarantee of the capital or returns. With a long-term financial goal, the policyholder can request to invest a higher value in equity and dare to risk the ‘no guarantee’ option in order to create a bigger retirement corpus.
A policyholder can also extend the accumulation period or deferment period until the age of 60 years with the same policy and same terms and conditions. - Withdrawal Limit on Pension Plans Raised to 60%:
Liquidity is made more flexible for policyholders by raising the withdrawal limit up to 60% at vesting, death, or surrender as compared to the current limit of 33%. In addition, when you withdraw a lump sum from pension plans, only one-third of the sum withdrawn will be tax-free.
Impact: The additional liquidity allows policyholders to withdraw funds for major life events. At maturity, they can purchase an annuity from insurers other than their original pension plan issuers. - Revised Surrender Value Norms:
Surrender value related norms are going to be favourable to policyholders with the implementation of the new guidelines. The guidelines suggest that a policyholder can surrender his policy after two years and still receive a specified surrender value. Surrender value means the amount you get when you surrender or terminate the policy before its maturity.
Impact: You can now surrender or terminate the policy after the second year unlike the earlier system of holding onto the policy for a minimum of three years to get the surrender value.
You will receive 30% of the total premiums paid less any survival benefits already paid if you terminate the policy after completing two years. If you terminate after three years, you will receive a surrender value of 35% of the total premiums paid less any survival benefits already paid. On the other hand, you will receive 50% of the total premium paid if you surrender the policy between the fourth and seventh year. Terminating the policy during the last two policy years can get you up to 90% of the total premiums paid. - Updated Partial Withdrawal Limit:
Policyholders can withdraw up to three times during the policy term; a maximum of 25% of the fund value at the time of withdrawal can be withdrawn. The withdrawals must be linked to life events such as for higher education, purchasing or construction of a residential property, children’s marriage, or critical illness (self or spouse). In contrast, partial withdrawal is not allowed in the case of group unit-linked insurance plans.Until now, there was no specified limit on the amount that can be partially withdrawn. Each insurer had the freedom to specify their own limits. Also, partial withdrawal option gets activated only after completing five policy years. Impact: Due to the implementation of the withdrawal limit, it provides an opportunity for the policyholders to build larger corpus instead of withdrawing the money and missing out on the benefits.
For any clarifications/feedback on the topic, please contact the writer at apoorva.n@cleartax.in.