5-year lock-in for Ulips, charges slashed

If an insurance agent is trying to convince you to invest in a unit-linked insurance plan (Ulip), ask him to return after September 1, 2010.

You will get a better deal. The Insurance Regulatory & Development Authority (Irda) has altered some essential elements of Ulips that will benefit new policyholders.

Investments in Ulips will be locked in for five years. And that’s the good news. For staying in, you will be charged less as commissions and expenses.

Even if you opt out earlier, the discontinuance charges will be lower than they were before.

“Charges on Ulips are mandated to be evenly distributed during the lock-in period, to ensure that high front-ending of expenses is eliminated,” Irda’s new guidelines issued on Monday say.

In the first five years, the difference between the returns earned on investments and the net returns given to you cannot be more than 4%, taking both commissions and charges into account. This figure narrows down to 3% by the 10th year in a tapered scale, ending with 2.25% after the 15th year.

Says Rajesh Sud, CEO of Max New York Life Insurance: “There could be a period of adjustment as a result of the changes, but the value it adds to the customer should attract him to the products and offset the negatives.”

Earlier, those withdrawing from the scheme half-way through the lock-in period had to forgo all the premiums paid. Not anymore.

“The proceeds of the discontinued policy shall be refunded only upon completion of the lock-in period, provided that, where a policy is discontinued, only discontinuance charge may be levied by the insurer, and no other charges by whatsoever name called shall be levied,” the guidelines say.

The discontinuance charges have been rationalised, depending on the number of years for which the premiums were paid. For policies with an annualised premium of upto Rs 25,000, the charge will be a maximum of Rs 3,000. For annualised premiums above Rs 25,000, the charge will be a maximum of Rs 6,000. The charges can come down to Rs 1,000-2,000 if the fourth year’s premium has been paid.

After five years, there are no discontinuance charges. This ensures that policyholders are not gypped merely because they didn’t keep up their premium payments.

As pension funds on the Ulips platform have to offer a minimum guaranteed return of 4.5% per annum, most of the investments will have to be made in debt-oriented securities and a smaller proportion in equities.

Other insurers are worried that the new guidelines will eliminate small investors in Ulips. “Small, regular premium policies will become unviable. A large proportion of people who were paying premiums of less than Rs 15,000 or so a year will suffer badly.

Secondly, the commission structure can’t sustain an agent’s income, and the agency channel will suffer badly. I hope we don’t land up in a situation where the product is very good but no one is willing to sell it,” says Kamesh Goyal, Country Manager & CEO, Bajaj Allianz Life Insurance.

Your life insurance agent cannot get anything over and above the commissions as his remuneration. Which means agents will have to let go of all foreign trips, expensive gifts, or fully-sponsored family trips as compensation.

“There could be an impact on sales, though the full effect remains to be seen. Additionally, the reduced distributor commissions could make it less attractive for them to sell these products,” says IDBI Fortis Life Insurance CEO and managing director GV Nageswara Rao.

The average distributor, he said, makes Rs 5,000 a month. A reduction in this amount may make the trade unviable.