Easing rules for life insurance

There is a clear upside to the fight between regulators Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Authority (Irda) to regulate Unit Linked Insurance Plan (Ulip) — a life insurance product that invests money in stocks and debt instruments. What will prove to be a game-changer for the industry, a fortnight ago Irda tightened the screws on the norms for Ulips and pension plans, while increasing the risk cover they offer. A slew of measures have been introduced to make these products more investor-friendly.

The timing of the move is significant as it came when Irda is fighting Sebi to retain its independent jurisdiction over Ulips. For a period of six months now, the two regulators have been involved in a tussle over the control of Ulips. Sebi has termed Ulips as investment schemes like mutual funds, and thus wanted to control them. The spat surfaced in January this year, when Sebi  issued a notice to 14 insurance  companies seeking an explanation as to why Ulips were launched without its approval and why appropriate action should not be taken against them.

It went on to become a full-blown war when on April 9 2010,  Sebi banned 14 insurance companies from selling Ulips. The matter has since gone to the Supreme Court which would decide who will control Ulips after hearing the case from July 2010. But, that has not stopped Irda from making some major changes in the rules that govern Ulips.  Look at the changes brought in by the regulator that will kick in from July 1. In the case of Ulips, investors now cannot surrender a policy before the completion of five years. In addition, partial withdrawal on all Ulips, except pension plans, can be made only after the fifth year, which was earlier permitted after three years.

Longer commitment
The industry has welcomed this move as it is expected to prove beneficial to investors due to the nature of the product. Ulips are front-loaded products, that is, a large portion of the premium goes into meeting various charges initially, leaving very little to be invested. So they begin to give returns only after four to five years. Taking this into account, this move of a lock-in period of five years is expected be a pro-investor move by the regulator.

This is also expected to make Ulip investors more cautious. Talking to Deccan Herald Aegon Religare Chief Marketing Officer Yateesh Srivastava said, “the move is good as it encourages the customer to review what he’s buying because now he’s locking in his money for a longer period.” Also, another advantage is that now Ulips will be in sync with tax laws that make a lock-in of five years mandatory to avail section 80C benefits.
Apart from this, the move is expected to give Ulips a long-term character and to curb mis-selling. As the front-loaded structure implies high commissions initially, customers were often encouraged by agents to churn their products either by surrendering or making partial withdrawals. In fact, with numerous complaints coming in, Irda had recently asked insurance companies to disclose the commission paid to the agents. This move is expected to be a deterrent to these practices. As Bajaj Capital Executive Vice-President Vinay Taluja said, “it is giving a clear message to the investor that insurance is not a short-term plan. Now, people who were conducting practices like selling it as a short-term investment need to be cautious.”

Retirement benefits
Another change the regulator has called for is that now, a part of the top-up premium (additional premium) should be used for the purchase of risk cover. Earlier, any top-up investments up to 25 per cent of the annual premium were not required to have any insurance component. This is also seen to be a good move as top-ups now will have a component of insurance which will enhance the life cover of the investor which was not the case earlier. As Srivastava put it: “this move gives the insured the flexibility to adjust his protection need by using top-ups.” In case of unit-linked pension plans (ULPPs) and annuities, the regulator has banned partial withdrawal from July 1, which was so far allowed after three years. So the option of partial withdrawal will not apply for pension plans. It has enforced a lock-in period for ULPPs till maturity. A pension plan purchased from a life insurer would be locked-in for a term decided by the buyer. Given the fact that pension is a post-retirement product and is meant to provide an income in the later stages of life, removal of partial withdrawal is seen as a very good move from the customer’s point of view.

As Life Insurance Council (a body representing life insurance compamies in India) Secretary General SB Mathur said, “This move will bring in discipline which will help people to save for their retirement.” In addition to this, if an investor surrenders the policy before maturity, he will get only one-third of the surrender value as lumpsum payment; with the remaining he would have to buy an annuity, or a pension product.
While the advantage of this is that it helps policyholders build a large corpus, what has to be taken into account is that withdrawal will not be allowed even in the case of an emergency or extingency.  Another big change brought in by Irda is the mandatory insurance cover for pension plans. Againts the present system of life cover being optional with a pension plan, all unit-linked insurance products, including pension plans, will now have to give an insurance cover to its customers.

Earlier, when there were a number of Ulip pension plans without any sum assured, the investor was at the mercy of market dynamics. Some think this move will benefit investors but many don’t.

Taluja said, “the investor benefits as earlier, in a pension policy in case of death of the investor the family would get only the fund value. Now, depending upon the product construct, they will get either both the sum assured plus fund value or whichever is higher.”

More expensive
The flip side to this is that now the pension plans will become costlier, as there is a compulsory mortality charge which will be deducted from the premium amount, reducing the investible money. (Mortality charges for a 50 year old person will be around Rs 400 for a cover of Rs 1 lakh.) This means there will be less money left for pension. Another point to be noted is that some people who are otherwise not eligible to be insured due to some critical ailments or due to advanced age, are able to invest in annuity plans in the present form. But in future mandatory insurance clause will indirectly stop them from investing in pension plans.

    Mathur explained, “Usually, its when a person is in his 50’s and his responsibilities toward his family are taken care of that he thinks of saving through pension products till he retires at say the age of 60, so that pension starts coming when he stops working. At this age he is more interested in a regular inflow of funds rather than insurance cover, which will prove expensive and also require them to undergo medical tests. So, these people will be denied an opportunity to build a corpus through pension.”

However, if a person has accumulated cash he or she can buy an immediate annuity without paying for mortality charges as there is no risk cover during the vesting period.
These changes seem to be brought in both to address the complaints against the product (Ulips), and as an attempt to silence Irda’s critics. If more such issues are addressed, the tussle between Irda and Sebi may lead to a much-improved product.  
As Mathur summarised it, “Irda has said that while savings cannot be de-linked from insurance, certain products where the investment component was higher  like certain pension products and top-up portion of Ulips, have been fine-tuned.”
DH News Service