In order to comply with new IRDA guidelines, insurance companies will withdraw their existing ULIP policies and substitute with new policies. But existing policy holders need not worry about their investment as it will not be disturbed. New policies of ULIP of insurance companies need some waiting time in order to re-plan and solicit clients. Since for pension plans having Units, IRDA has made compulsory minimum guaranteed return of 4.5% p.a., insurance companies are in a fix whether equity portion is to be reduced still further and having debt and other sure shot investments thus safeguarding the insurance companies profit. This is mainly because of unstable equity market in India.
Another important thing done by IRDA is standardization of surrender charges. These charges are applicable when a policyholder surrenders the policy before the predetermined lock-in period. As already mentioned in my earlier article, the lock in period for ULIP products will be 5 years from henceforth and the surrender value amount will be paid only after 5 years only. In order to safeguard investors’ interest, the regulator has made it mandatory for insurers to pay a minimum of 3.5% interest p.m. on the fund value.
For example, one insured person opts for a ULIP with a premium of Rs.1,00,000 per annum and decides to discontinue the plan after three premium instalments. So he must have paid R.3,00,000 so far to insurance company. Assuming the fund grows at 10% p.a., the fund value at the time of discontinuation would be 3,30,000. The insurance company will deduct surrender charges (which is mainly admin,mortality and acquisition charges) as given by IRDA. The limit of surrender charges charged by insurance companies are capped by the following formula.
For Products whose Maturity is less than 10 years
“The difference between gross yield and net yield cannot exceed more than 300 basis points” (100 basis points = 1%) .
“In this case , fund management charge cannot exceed 3%”
For Products whose Maturity is more than 10 years
“The difference between gross yield and net yield cannot exceed more than 225 basis points” (100 basis points = 1%) .
“In this case , fund management charge cannot exceed 2.25% ”
Taking the above guidelines, the maximum insurance companies charge for surrender cases is 3%. So for Rs. 3,00,000, the surrender charges at the maximum will be Rs.30,000/-.So the net value of the fund will be Rs.3,30,000–30,000= 3,00,000/-. So for the remaining two years, the insurance company has to pay 3.5% interest per annum to the insured who surrendered the policy. So the insured person will get Rs.21000 as interest for the remaining 2 years and the total maount will be Rs. 3,21,000/- which will be payable after lock in period of 5 years.
C. R. Venkata Ramani