In a series of reforms initiated by the insurance regulator, Insurance Regulatory and Development Authority (Irda), to make unit-linked insurance plans (Ulips) more efficient and transparent, the latest one is a draft proposal on standardization of terms and conditions of Ulip products and treatment of lapsed policies.
The guidelines seek to cap surrender charges at up to 15% of the fund value in the first year for policies of tenor more than 10 years and 12.5% for policies with tenor of less than 10 years. This charge comes down to 5% and 2.5%, respectively, in the fifth year of the policy and becomes nil for policies of less than 10 years after the fifth year. For tenors above 10 years, the charge in the sixth year is 2.5% which becomes nil in the seventh year.
For you, besides knowing the surrender charge which currently is not uniform and goes up to 90% in some cases, there is no direct benefit, as a low surrender charge doesn’t mean you should be encouraged to surrender. The policy still has a lock-in of three years and you get section 80 C benefit only if you stay invested for five years. But at the back end, the low surrender charge would mean insurers price their policies more efficiently and discourage agents from nudging you to churn.
The guidelines also specify the manner in which your lapsed policies will be treated. Your policy, as is the norm even now, is considered lapsed if you skip your annual premiums even after 30 days from the due date. Once the policy lapses, the guidelines seek to give five years for you to reconsider and revive your policy. However, the revival will happen at the discretion of the insurer.
The other options that you can exercise will be to continue with the risk cover and forsake the fund value. The fund value will pay for your insurance charges till such time it can and then the policy terminates. You can also choose to continue with both fund value and risk cover or to just pull out. Currently, if your policy lapses before three years, typically you get nothing back but as per the new guidelines, the policy will pay you the surrender value after three years or after the expiry of the revival period of five years if you choose to pull out.
The draft regulations are currently available for public comment on the regulator’s website www.irdaindia.org and after due consultation, Irda will notify these guidelines.
Broadly, these are in your favour as they put the onus on the insurer to treat Ulips as a long-term product and seek to provide you cover and some money back in case of a lapse.