IRDA cracks the VIP

The universe of freedom for insurance companies just shrank a little. Exactly a month after imposing a temporary ban on universal life products, the Insurance Regulatory Development Authority (Irda) has announced guidelines to regulate them. Often confused with unit-linked insurance products (Ulips) by investors, the universal plans had gained notoriety for being high on agent commission and low on transparency, features they shared with Ulips.

Irda has clarified that universal plans will be known as variable insurance products (VIPs), which will be traditional products, not Ulips. Every policy must have a corresponding account where the balance shows the accrual to the policyholder. Charges must be deducted under three heads — risk premium, administrative charges and agents’ commission. The minimum duration of policy and premium payment must be five years and all VIPs must have a lock-in period of three years. The policy account must be credited with premium net of all...charges and a statement of policy account sent to the policyholder at least once a year.
Expenses have been capped at 27.5% of the first year premium, 7.5% of the second and third year premium and 5% for the fourth and subsequent premium. Irda has also made surrender benefits more investor-friendly. If the policy is surrendered in the first, second or third year, the amount will be paid after the lock-in period ends. If the surrender takes place during the fourth or fifth year, the policyholder gets 98% of the balance in the account and will be payable immediately on surrender.
No partial withdrawals are allowed, but the investor is eligible for a loan of not more than 60% of the balance in the policy.
The insurance regulator has justified VIPs, saying they provide consumers greater flexibility to change the mortality and savings proportions of their policies as individual life stages.need changes. Currently, four com-panies — Max New York Life, Aviva Life, Bharti Axa Life and Reliance Life — offer these plans.
Universal life plans cropped up a year back when there were no clear guidelines to regulate them. “We have received several complaints on the sale practices of insurers regarding universal life products and there was a need for a better regulatory framework for protecting policyholders’ interest,” says R Kannan, member (actuary), Irda. Anecdotal evidence says that agents used to get a commission of as much as 70% of the first year’s premium.
For investors, the main advantage is flexibility. The premium and the sum assured can be changed during the life of the policy. You can raise the premium amount with rise in income or decrease it if income drops and decide the frequency of premium payment — yearly, quarterly or even monthly.