In the latest draft guidelines issued in October, the Insurance Regulatory and Development Authority (Irda) has proposed that the minimum death benefit for linked insurance plans, where a portion of your money is linked to market, will be sum assured plus the investment amount instead of the higher of the two.
What is a linked plan?
A linked insurance plan is an investment product that links your return to the market or an index. These plans are transparent and the amount you invest can be segregated into what is invested and what goes off as costs.
Since the costs are known, Irda has capped the costs for unit-linked insurance plans (Ulips) and has proposed cap costs in other linked plans called index-linked insurance plans. These are now called variable-linked insurance plans under the draft proposal.
What is death benefit?
At present, there are two types of death benefits that linked insurance plans such as Ulips offer. A type 1 Ulip offers the higher of the fund value or sum assured to the beneficiary in case of death of the policyholder. A type 2 Ulip offers both: so if the policyholder dies during the term of the policy, the beneficiary gets both the sum assured and the fund value.
Under the draft guidelines, Irda has proposed that only the second version of Ulip or linked insurance plan be made available. So if the policyholder dies, the beneficiary is entitled to the sum assured plus the fund value or the investment amount.
What is the impact?
A type-1 Ulip is a tad better than a type-2 Ulip in terms of return. That’s because in a type-1 Ulip, one cost head called insurance charge or mortality charge is levied only for a short period of time. Since the policy offers you the higher of the sum assured and the fund value, it levies mortality costs till such time the fund value exceeds the value of the sum assured. After that your mortality cost becomes nil. But in a type-2 Ulip, which promises to pay both the sum assured and the fund value, the insurance cost is levied till the end. This impacts your return but in its place you get additional protection in terms of both sum assured and the fund value.
After cost caps, Ulips have become less expensive and if you choose a type-2 Ulip over putting your money separately in a term plan and a mutual fund, hold it till maturity.