Life insurance products are undergoing major changes, and mostly to the benefit of policyholders. The Insurance Regulatory and Development Authority of India (Irdai) recently released the final product regulations covering term, endowment, Ulips and pension plans.
1. Higher withdrawals allowed in pension plans
The maximum withdrawal allowed at maturity under pension plans has been increased from one third to 60%. However, this will not bring insurance pension plans at par with the National Pension System (NPS). In NPS, the 60% withdrawal allowed at maturity is tax free. In pension plans, 60% withdrawal is allowed now but only one third is tax-free. “Withdrawal of up to one third of the corpus would be tax-free, but anything above that is taxable,” says Anilkumar Singh, Chief Actuarial Officer, Aditya Birla Sun Life Insurance.
Rules have also been tweaked for premature part withdrawals. Once the five-year lock-in ends, policyholders can make partial withdrawals of up to 25% of the fund value, but only thrice during the policy tenure. However, such withdrawals will be permitted only if funds are needed for specified goals—higher education, children’s wedding, purchase or construction of a house and treatment of critical illness of self or spouse.
2. Freedom to take risks, invest in equities
The change that is likely to make the maximum impact pertains to unitlinked pension segment, which lost steam after insistence on guarantees and purchase of annuities from the insurer who issued the deferred pension plan. “As of now, insurers have to give a guarantee at the vesting date, which means they have to invest largely in debt and are not able to generate higher returns. Now, this is optional. Policyholders can decide whether they want assured benefit or not,” says Singh. Those in the younger age brackets who can stomach risks and afford to stay invested over the long-term can choose to deploy funds in equity.
Regulations that mostly benefit policyholders
|EXISTING RULES||NEW RULES|
|Life cover in Ulips||Minimum 10 times for those under 45||Minimum seven times for those under 45|
|Maximum lump sum withdrawal at vesting of pension plans||One third||60%|
|Minimum term for acquiring surrender value in traditional plans||Three years||Two years|
|Freedom to choose annuity provider||Annuities to be purchased from the insurer who has issued deferred pension plan||Policyholders can approach insurers offering higher rates for 50% of the corpus|
|Flexibility in asset allocation in pension Ulips||Guarantee meant insurers had to invest in debt products||Policyholders to decide whether they want assured returns or not|
|Direct premium payment for Ulip riders||Premiums for riders like accident or disability benefit accounted for by cancelling units||Direct premium payment means a larger proportion of base Ulip premium is invested|
3. Greater choice when buying annuities
Annuity purchase conditions, too, have been liberalised. “Open market for the option of purchasing annuity, up to 50% of the investible corpus is a key change,” notes Aalok Bhan, Director and Chief Marketing Officer, Max Life Insurance. Currently, a policyholder has no choice but to purchase annuities at maturity, from the insurer who has issued the policy. Lack of competition hurts policyholder interests, as they cannot shop around for higher annuity rates.
Annuity is regular, guaranteed pension income payable to the policyholder from the date of vesting till death. “Relaxation of this restriction will allow policyholders greater flexibility to seek better rates,” says Santosh Agarwal, Chief Business Officer, Policybazaar.com.
4. Shorter period to acquire surrender value
You needn’t wait three years for your policy to acquire a guaranteed surrender value – the amount you will receive if you decide to exit prematurely. “Irrespective of premium paying terms, policies will now acquire the minimum guaranteed surrender value if they have paid at least two years’ premiums, against three years now for policies with a premium paying term of over 10 years,” says Singh. At present, you are entitled to 30% of premiums paid (minus any survival benefits paid out) if you surrender your policy during the third year.
The new rules have raised this to 35%. If you have paid two premiums, you will get 30% of the amount. In case of policies with tenures greater than seven years, insurers had to file surrender value structure with Irdai. Now the regulator has specified that the surrender values should increase progressively and converge to at least 90% as the policy approaches maturity. Despite the rise in guaranteed surrender value, however, exiting traditional non-linked products remains an expensive and tedious affair.
5. Flexibility to reduce premium
“The regulations also provide policyholders the flexibility to reduce their premium after the fifth policy year,” says Tarun Chugh, MD and CEO, Bajaj Allianz Life. Being long-term products, insurance premiums have to be serviced annually and any financial crunch around the premium paying date can result in policy lapsation. Instead, now you can reduce your premiums by 50% and still keep the policy in force.
6. Lower life cover in Ulips
On the Ulip front, the minimum cover offered will come down from 10 times the annual premium to seven times. At present, insurers have to offer a minimum cover of 10 times the annual premium to those under 45 and seven times to those over 45. For policyholders who are not keen on the protection element, smaller cover will mean lower mortality charges.
A higher proportion of premiums will be directed towards investments. However, there is a catch. To maximise tax benefits under Sec 80C and 10(10D), the life policy has to offer a cover of at least 10 times the annual premium. “For policies with seven times cover multiple, tax breaks under 10(10D) is not applicable,” says Agarwal.
7. Extended revival period
Policyholders wanting to revive their Ulips will now get three years instead of two. For nonlinked plans, it has gone up to five years.Insurers will have to intimate them within three months of lapsation for them to initiate action in case they want to revive the policies.