The Insurance Regulatory and Development Authority of India (IRDAI) has recently introduced new changes to insurance policies, making them more transparent, flexible, and customer-oriented. The new guidelines affect Unit-Linked Insurance Plans (ULIPs) significantly.
Here, we explain these regulations and what they mean for people buying new ULIPs. First, let us look at what is ULIP policy.
ULIP – An overview
ULIP is a combination of a life insurance policy and an investment option. You can buy a ULIP in exchange for regular premiums. The insurer divides the premium into multiple investment instruments, including equity, debt, and hybrid funds. ULIPs should be considered as a long-term investment option if you desire to build substantial wealth. If you are thinking, “why should I invest in ULIP,” read on to know about the modifications that it has gone through according to the latest IRDAI norms.
- Longer renewal period
Before the new guidelines, the non-payment of premiums resulted in the cancellation of the policy, which you could renew within two years from the First Unpaid Premium (FUP). The new renewal period is now three years. All you have to do is to pay the previously unpaid premiums. However, any policy lapse due to non-payment within the lock-in period of five years is renewable only within the remaining tenure.
The paid-up policy is one of the ULIP benefits that has changed under the new guideline. Previously, a ULIP was a paid-up policy if you had paid the first three yearly premiums. This would make the policy stay active until its maturity tenure, even when you did not continue to pay the premium. Now, if you pay the premium for five years and then stop, the paid-up facility will be applicable for a renewal period of three years only, after which the insurer will terminate the ULIP. It will not continue until the original date of maturity.
- Lower sum assured leading to a reduction in mortality charges
Under the new IRDAI guidelines, your ULIP’s sum assured can get significantly lower. Previously, only people over the age of 45 could buy a life insurance cover lower than ten times of the yearly premium. Now, the ULIP life insurance cover is seven times the yearly premium for everyone, whether they are below or over the age of 45. Hence, the sum assured under the new rules decreases. This new guideline can help you as mortality charge deduction will now be lower, which will offer greater returns.
- Partial withdrawal
One of the best ULIP benefits is the partial withdrawal facility. However, this option was not clearly defined earlier. The new guidelines have made it more transparent. After the initial lock-in period of five years, you can now withdraw 25% of the total fund thrice during the ULIP’s tenure. The partial withdrawal option is available for various financial needs, such as medical emergencies, higher education of your children, and constructing or buying a new house, among other objectives.
- Higher risk cover
Previously, in some cases, the sum assured or the maturity benefit of ULIPs may have been lower than the total premium paid. This would happen for policies with long tenures and low sum assured. However, the new IRDAI guidelines ensure that the returns from the ULIP are always higher than the total premium. Now, if the aggregate premium paid is higher than the ULIP’s fund value or sum assured, the insurer is liable to pay 105% of the cost that you incurred during the plan’s tenure.
- Reduction of premium
One of the most customer-oriented ULIP benefits under the new guideline is the flexibility to lower the yearly premium. After the initial five years, you have the option to reduce your premium by up to 50% of the original amount.
Now that the ULIPs are more transparent, you can plan to purchase a suitable policy at the earliest.