Ulip guidelines: What should investors look for

1) Immediate fallout of the latest Ulip guidelines could be that insurance companies may tend to go slow on issuing pension plans. Expect some hesitation from insurers on this front now that the regulator has introduced a minimum guaranteed return of 4.5% on unit linked pension products. This is to protect lifetime savings of pensioners and to differentiate pension from other investment products. A guarantee of minimum returns would make it difficult for issuers to invest pension funds in riskier financial securities, such as equities.

Equities offer superior long-run investment returns but not without a risk of loss of capital. Hence, insurance companies may face the dilemma while issuing pension products with guaranteed returns. Industry observers feel that there will be very few such pension plans that will be on offer after September. Hence, those interested in unit-linked pension plans may need to hurry.

2) Another major step taken by Irda was the standardisation of surrender charges. These charges are applicable when a policyholder surrenders the policy before the predetermined lock-in period. Earlier in case of such policy surrender, the return on the investment was dependent on the discretion of the insurer. These charges are now standardised and are also discounted to a large extent.

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Soon, all insurance companies will withdraw most of their existing unit-linked insurance plans (Ulips) and will issuing a new set of such policies. This is in response to the Ulip guidelines issued by the insurance regulator Irda on June 28, 2010. Existing policyholders need not worry since the rejig will not affect their current investments in these plans.

But those who wish to buy new policies will have to wait until the new plans are in place.

3) In a bid to promote Ulip as a long-term product, Irda has increased the lock-in period from three years to five years. This means, in case a policyholder surrenders the policy before five years, the fund value will be returned to him only after this period. To be fair with investors, the regulator has made it mandatory for insurers to pay a minimum of 3.5% interest per annum on the fund value. For instance, a healthy male opts for a Ulip with premium of Rs 50,000 and decides to discontinue the plan after paying two annual premium installments.

Assuming the fund to grow at 6% per annum, the fund value at the time of discontinuation would be Rs 103,000. The insurance company will deduct Rs 4,000 from the fund value as surrender charges . According to the new guidelines the insurer would pay 3.5% interest per annum on the remaining fund for three years. This means the policyholder would receive Rs 109,760 three years after the discontinuation of the policy.

4) The new guidelines pertaining to surrender of policies give investors the flexibility to surrender a plan without loosing much of their fund value. But there is a caution - it may also provoke distributors to promote policy mixing. In order to earn more commission, distributor may ask policyholder to surrender and opt for a different policy under the pretext of getting higher returns.

Investors need to beware and not fall prey to such attempts of forced mixing. Remember that insurance is a long-term play and one needs to remain invested for long to obtain meaningful returns. Another point worth noting is that due to the cap on charges according to the latest guidelines, Ulip commission has reduced. But on the traditional products, it remains as high as 30-40%.

This may make insurance distributors (agents) focus more on selling traditional products such as term insurance, endowment and money-back policies. Hence, investors need to be sure of their needs and long-term requirements before opting for a policy. If tax-saving is the motive, then one may go for Ulip.

A few money-back products also offer tax advantage under section 80C. Through the new guidelines, Irda has made it compulsory for agents to disclose the commission earned on the policy offered. Irda has also tried to restructure the grievance cell for the policyholder.

It has made it mandatory for insurance companies to have a help-line number and a grievance redressal officer to tackle complaints of policyholders. One can call or mail their complaint to the insurer. Insurance companies should acknowledge receipt of a complaint and mention the procedure as well as time they would take for redressing the grievance to the customer within three days of receipt of the complaint.

In case the insurer fails to respond within two weeks, one has the option to approach Irda for registering complaints and taking action to resolve them