Change in Ulip structure

THE CHANGE
Capping of charges on Ulips, extension of lock-in period from 3 years to 5 years and raising of minimum cover to 10 times the premium.

THE INTENT
The aim was to improve the returns for investors by reducing charges and to ensure that Ulips are seen as long-term products. The hike in the minimum cover stresses on the insurance aspect of Ulips, while the increase in minimum lock-in period promotes the financial protection facet.

THE IMPACT
It is paradoxical that the most sold financial product is also the one with the most problems. Ulips give you the best of both worlds by combining life insurance and market-linked investments.

"Irda's primary focus has always been, and will continue to remain, the protection of policyholders' interests." J. HARI NARAYAN Chairman, Insurance Regulatory and Development Authority

They can help you create long-term wealth through investments in equities. At least, that's the marketing peg. The reality is that very few investors in Ulips understand what they have bought. Most are unaware of the high charges levied in the initial years. Nor do they realise what the agent is up to when he says that they have to pay the premium only for a few years.

The new Irda guidelines on Ulips have changed this to a certain extent. Ulips bought after 1 September 2010 must ensure that the difference between the gross yield (what the plan would have earned if no charges were deducted) and the net yield (what the plan earns after deduction of charges) does not exceed 2.25-3%. Of course, this cap is applicable only at the time of maturity of the policy.

On the face of it, it seems this change will only result in higher returns for investors, but the impact goes beyond this. To ensure that the difference is within the suggested cap, insurance firms will be forced to offer long-term plans. Irda Chairman J. Hari Narayan says the changes will benefit investors by lowering the costs of Ulips and making them more transparent. Irda's new norms also stress on the insurance aspect of Ulips.

FOREIGN SHAREHOLDING The Insurance Bill proposes to raise the ceiling on foreign stake in life insurance firms from 26% to 49%. If passed, it will encourage more foreign partnerships.

The minimum sum assured has been hiked from five times the annual premium to 10 times. While this means higher cover for the policyholder, it also means higher mortality charges. However, keep in mind that to qualify for tax deduction under the proposed Direct Taxes Code, the death benefit needs to be 20 times the annual premium.

The most important point is that the new guidelines will ensure investors look at Ulips as long-term products. The lock-in period has been increased from three years to five years and the minimum premium paying term has been increased to five years. No longer will investors exit after three years, which had benefited the broker more than anyone else. This is likely to make policyholders adopt a disciplined savings and investment strategy.