New Delhi: The Insurance Regulatory and Development Authority of India’s (IRDAI) new guidelines for unit-linked insurance plans (Ulips) and traditional life insurance policies will come into effect from Saturday (February 1). The regulator has instructed insurers to make changes in Ulips and traditional life insurance policies.
Some of these changes include- time period within which a policy can be revived, reduced sum assured for buying Ulips, increased withdrawal limit of pension plans and more. As per the new rules, the policy revival period has been increased from two to three years. The sum assured for buying Ulips has been reduced from 10 times to seven times the premium paid.
The withdrawal limit of pension plans has also been increased to 60 per cent. Surrender value norms have been revised to benefit policyholder. Standardised partial withdrawal limit has been set which means you can now partially withdraw thrice during the entire policy tenure.
Here’s how these new changes will impact you:
1. Increase in time period allowed for policy revival: According to the new guidelines, insurers have been to increase the time period allowed for the revival of life insurance policies. In order to comply with this provision, insurers have to increase the time period allowed for the revival of Ulips to three years from the date of the first unpaid premium.
Currently, you get 2 years to revive your lapsed policy. For non-linked insurance products, the revival time period will be
five years. This will benefit you as it takes into account your interest and your financial conditions. If for some reason, you have not been able to pay premiums and discontinued your life insurance policy, you will now get an additional year to revive that lapse policy.
2. Reduced sum assured for buying Ulips: The sum assured for buying Ulips has been reduced from 10 times to 7 times the premiums paid. From February 1, the minimum sum assured for buying Ulips for a policyholder below the age of 45 years will be reduced from to seven times the annual premium paid. At present, only those above 45 years of age are eligible to buy Ulips with sum assured less than 10 times of annual premium.
This will benefit people greatly as a lower sum assured could result in better returns since a lesser amount of mortality charges will get deducted. However, keep in mind that going for a lower sum assured will not help you avail tax benefits.
Currently, you can avail tax benefit on policies which have a sum assured of 10 times the annual premium or more.
3. Pension plans: The insurers offering a mandatory guarantee on maturity proceeds on pension plans will now become optional. Currently, insurers have to offer guarantees on maturity proceeds which means that they have to invest in debt instruments to give guarantees on maturity proceeds. This, in turn, lowers the potential return on investment.
Now as per the new rule, policyholders can decide whether they want assured returns giving you the opportunity to opt for the possibility of earning a higher return on their investment by choosing the ‘no guarantee option’. They will also have the option of asking the insurer to increase equity exposure in the policy. However, do not forget that equity investment comes with zero guarantee of returns or capital. So, be careful.
Apart from this, policyholders will also have the option to extend the accumulation period or deferment period within the
same policy with the same terms and conditions up till the age of 60. Consumers can now consider building a larger corpus where they can now also initiate partial withdrawals only thrice during the entire policy term up to a maximum of 25 per cent of the fund value. Earlier, the partial withdrawal limit wasn’t fixed by the regulator.
4. Increased withdrawal limit from pension plans: In order to improve flexibility and liquidity for policyholders, insurers are now mandated to allow customers to withdraw a larger lump sum of 60 per cent at vesting, surrender or death, as opposed to the current 33 per cent. However, know that if you withdraw a lump sum from pension plans, only one-third of the corpus will remain tax-free (as is the case now), not the entire 60 per cent. The additional liquidity will allow policyholders to withdraw the corpus for major life milestones, or even for treatment of critical illnesses.
Also, at the time of policy maturity, policyholders can now purchase an annuity from insurers other than from whom they have originally bought the pension plan.
5. Surrender value norms: Surrender value norms will now be more favourable for policyholders. For those who are not aware, surrender value is the amount one stands to get when they decide to make a premature exit from the plan i.e. when one decides to completely withdraw or terminate the policy before its maturity.
In the case of a traditional life insurance policy, if for some reason the policyholder has to terminate the policy prematurely, they won’t have to wait three years for their policy to acquire a guaranteed surrender value. Instead, they can terminate the policy after the second year. If the policy is terminated after 2 years from its commencement, a fixed sum of up to 30 per cent of the ‘total premium paid less any survival benefits already paid’ will be given to the policyholder.
If the policy is surrendered after three years, the policyholder will get ’35 per cent of the total premiums, less any survival benefits already paid’. For the 4th to 7th year, the surrender value will increase to 50 per cent. Further, if the policyholder surrenders the policy between the last two years before the policy matures, insurers will have to pay ’90 per cent of the total premiums paid less any survival benefits already paid’ to the policyholder.
6. Standardised partial withdrawal limit: Policyholders can now partially withdraw thrice during the entire policy term up to a maximum of 25 per cent of the fund value at the time of withdrawal, linked to defined life events. These life events include partial withdrawal for higher education, children’s marriage or critical illness (self and spouse) or buying or construction of a residential property.
Remember that no partial withdrawal will be allowed in case of ‘Group Unit Linked insurance plans’. Currently, there is no fixed limit on the amount that the policyholder can partially withdraw. With new rules coming in effect that will change. However, one must know that partial withdrawal will only be allowed after the completion of five policy years and on such partial withdrawal, no exit load or surrender charges will be applicable on the policy.
Since the regulator has capped the partial withdrawal at thrice during the entire policy term, you will now be able to build a larger corpus for your retirement.