New Delhi: Soon after the capital market regulator scrapped the entry fee on mutual funds, the insurance regulator on Wednesday capped charges levied on unit-linked insurance plans, or Ulips.
The decision is effective 1 October for new policies and 31 December for existing ones.
Ulips provide life cover and invest part of the premium in stocks and bonds. In most cases, the sum assured in the policy varies according to the value of its underlying assets.
The Insurance Regulatory and Development Authority, or Irda, said in a circular that for policies of 10 years or less, the difference between gross and net yields to a policyholder should not exceed 300 basis points. A basis point is one-hundredth of a percentage point.
In other words, charges on Ulips should not exceed 3 percentage points of gross yields, of which fund management charges should not exceed 1.5 percentage points. For policies of more than 10 years, the charges should not exceed 2.25 percentage points of gross yields, of which fund management charges are capped at 1.25 percentage points.
The Securities and Exchange Board of India has scrapped the entry load on mutual funds from 1 August.
“At the time of maturity, the insurer must issue the policyholder a certificate showing year-wise contributions, charges deducted, fund value and final payment made to the policyholder taking into account partial withdrawals, if any,” Irda said in its note.
“Anything which is in the customer’s benefit is good for the industry... We will have to examine the impact on all customer segments since the mortality charges are not uniform and vary with age,” said Rajesh Relan, managing director, MetLife India Insurance Co. Ltd. “We would not like one segment of the customer having to subsidize the other.”
Relan added that the move “is likely to drive Ulips more as an investment product than protection, thereby restricting the development of the protection industry. The regulation is also likely to help in the long-term nature of the business, which is the real essence of insurance.”
Ulips account for 80-90% of the total new business premium collected by private life insurers. For state-owned Life Insurance Corp. of India Ltd (LIC), Ulips account for around 65% of new business premium.
“While finer details are still to be seen, the move has come as suggested by the industry,” said S.B. Mathur, secretary general of Life Insurance Council, an industry body. “Policyholders are going to gain from the cap imposed on charges levied on market-linked policies.”