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No surrender charge for Ulips after 5 years

It also excluded mortality and morbidity charges from calculation of overall charges and fixed fund management charges at 135 basis points for all insurance contracts.

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The Insurance Regulatory and Development Authority (Irda) said on Thursday insurers cannot charge fees on surrender of unit linked insurance policies (Ulips) after five years, a move analysts said will put more money in the hands of the investor.

It also excluded mortality and morbidity charges from calculation of overall charges and fixed fund management charges at 135 basis points for all insurance contracts.

Earlier, Irda had capped Ulip charges at 300 basis points for insurance contracts up to 10 years and 225 basis points for contracts over 10 years to keep a tab on costs insurers charge from investors.

The guidelines come into effect from October 1, 2009. Insurance companies sometimes charge a nominal fee to customers to withdraw their unit-linked policies once the lock-in period ends. Policies withdrawn during the lock-in compulsorily attract a high surrender charge.

This will stop insurers from levying any charges on surrender of a policy from the fifth year and put in more money in the hands of investors, Karan Uberoi, analyst at J M Financial, said.

The mortality and morbidity charge relief will also help life insurance companies. The charge is the cost of protection element of an insurance policy which increases with age.
V Vaidyanathan, managing director & CEO, ICICI Prudential Life Insurance, welcomed the Irda move.

“This will promote the core concept of insurance, since mortality and morbidity are now excluded from the charge structure,” he said.

Debasis Sarkar, senior director and chief marketing officer, Max New York Life, agreed. “The exclusion of mortality and morbidity charges from the cap will ensure that there is no compromise on growth in sales of valuable life cover. This is of critical importance in a country like India where 96% of the households are vulnerable.

In addition, the life insurers will not have to resort to cross subsidisation across age groups to meet charge cap. The decision clearly indicates that Irda wants life insurance to be viewed as a long-term protection product.”

Insurers were apprehending that providing benefits of Ulips to senior citizens would be difficult with the inclusion of these charges in the previous Irda directive.

TR Ramachandran, CEO & MD, Aviva India said, “We welcome the clarification that mortality charge is not included in the cap. This allows insurance companies to continue to provide adequate protection to the policyholders, which is the core objective of a life insurance policy. Moreover, it allows companies to offer older customers the benefits of life insurance, without crossing the cap.”

KS Gopalkrishnan, chief financial officer & appointed actuary of AEGON Religare Life Insurance said, “This is a logical move as the charges for insurance component are dependent upon various factors including age of the individual, type of insurance cover and amount of insurance cover. The uniform sub-cap on fund management charges eases the administrative complexities.”

SB Mathur, secretary general, Life Insurance Council, however, said, “While this move is laudable, the customer is still subject to high service cost charges, especially the service tax on mortality premium. This should be ideally withdrawn as most of the service costs are absorbed by the customers.

Irda on Thursday said “certain concerns were expressed by the industry on July 29, 2009 to discuss all relevant concerns” and hence the modifications. (With Reuters)
 

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