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IRDA Wakes Up, ULIP Changes in Store


Says Mint:

Two Irda officials told Mint on Monday the regulator will soon declare stringent norms on front-loading of commissions, surrender charges, risk cover, top-up benefits, and fixed gains or sum assured for Ulips.

The most significant reform will be a cut in the commissions that insurance companies pay agents selling Ulips—from the current 57.5% over five years to 30-32%.

“The insurers were playing a trick with the policyholders by offering the benefit of Ulip charge limits only at the maturity of the product. We will now order the insurers to maintain a difference of at least 3.3 percentage points between gross yield and net yield on Ulip investments through out the duration of the policy and not only at the maturity,” said one of the Irda officials on condition of anonymity.

“Our proposal should bring down the first-year agent commission from 35% to 10-15%,” added the official. For pension plans, the first-year commission, will come down from 7.5% to about 5.5%.

Surrender charges, too, will be reduced to curb mis-selling.

The insurers were pushing for a hike in these [surrender charge cap] limits, but the regulator now plans to tighten it further. It will order insurers to deduct 10-15% of the annual premium only as the surrender charge and return the entire remaining fund value to the policyholder even in case of premature withdrawals.

In yet another significant proposal that will not only make Ulips attractive, but also distinguish them from mutual funds, Irda intends to increase the life insurance component in Ulips substantially and make it mandatory.

According to the plan, the life insurance component has to be at least 10 times the premium paid for policies up to 10 years and at least 1.05 times the annual premium for policies of 20 years and above.

For policies between 10 and 20 years, there will be yet another option—insurance cover of 0.5 times the policy term, multiplied by the annual premium. If the insurers are not comfortable with either of this, they will be required to provide a health cover of at least Rs1 lakh for each year of Ulip.

In yet another significant move, Irda is set to pass an order for insurers to have a guaranteed yield of at least 4.5% on the total premium paid for every equity-linked pension plan in the industry.

Emphasis mine.

I’m not sure this will work.

  • Commissions of >2% a year are the upper limit, compared to any othe product. These guys are trying to bring it down to 32% over  five years – or 6% a year. For pure insurance I get it, but not for insurance.
  • Gross yield versus net yield maintenance over the term of the policy will be useful in curbing bullshit like taking away your first year’s premium and then giving it back to you at the end of the policy.
  • The life insurance component part is hazy. 10x premium for upto 10 years, but only 0.5xterm for 10-20 years? That means a 11 year policy should have at only 5.5 times the premium – not very different from today’s 5 year default. Guess which one gets sold, the 10 year or the 11 year?
  • And what is 1.05 times the premium for >20 years? That makes no sense at all. Might be 1.05x term x premium, and the 10-20 year time frame should have 1.5x the term multiplied by premium. That makes sense. But we’ll know if it’s a typo or IRDA opening a back door, only after the actual rules come out.
  • Guaranteed yield in equity products? Oh this is so much fun. Guess what will happen. They WON’T put money into equities if they have to guarantee anything.

My verdict: They are not doing enough to curb misselling, just bringing commissions down a little bit, but not enough to make them comparable with other financial products. The above mentioned changes make ULIPs as a product less attractive also with guaranteed yields, and weird insurance requirements.


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