Irda also takes mortality, morbidity charges out of overall 3% cap
You can now surrender your unit-linked insurance plan (Ulip), purchased from a life insurer, after four years without having to pay any charge. This was announced by the Insurance Regulatory and Development Authority (Irda) today.
The regulator has also made some changes to the overall ceiling on Ulip charges, which were fixed at 3 per cent of the gross yield. As a relief to insurance companies, Irda has decided to keep mortality and morbidity out of the overall cap on Ulip charges.
At present, there is no standard norm for surrender value, which is akin to exit load for mutual funds.
With this latest Irda decision, insurers will have to pay the accumulated fund value, if a Ulip-holder surrenders his/her policy after four years.
At present, there are around 70.2 million Ulip-holders, of which 25.2 million deal with private players.
Insurers had demanded that mortality charges should be in line with the risk they were carrying and, hence, the decision should be left to them.
They had argued that capping of charges would lead to changes in the distribution model and reduction in commission and acquisition charges.
As per estimates by brokerage firm Edelweiss, for a typical back-loaded policy, the difference between gross and net yields to the policyholder ranges between 2.1 per cent and 4 per cent. This difference, according to Edelweiss, is likely to be higher for high charge front-loaded policies (4-4.5 per cent).
According to the revised circular, mortality and morbidity charges will be excluded in the calculation of the net yield. The difference in the net and the gross yield has been capped at 300 basis points. The modifications were made, keeping in view the concerns expressed by the industry on Irda’s July 22 circular capping the charges.
"The exclusion of mortality and morbidity charges from the cap will ensure that there is no compromise on growth in sales of valuable life cover. In addition, life insurers will not have to resort to cross subsidisation across age groups to meet the charge cap. The decision clearly indicates that Irda wants life insurance to be viewed as a long-term protection product,” said Max New York Life Insurance CEO and Managing Director Rajesh Sud.
V Vaidyanathan, MD and CEO, ICICI Prudential Life Insurance, said that excluding mortality and morbidity charges would promote the core concept of insurance.
It has capped fund management charges at 135 basis points for all tenures. Earlier, there were two caps -- one below 10 years and the other above 10 years. At present, this charge in equity varies between 125 basis points and 225 basis points, and in debt between 80 basis points and 100 basis points.
“Now people in the older age bracket seeking higher assured sum can be insured... Having one cap on fund management charge will result in better administration of the fund as insurance companies will have to manage only one fund,” said Kamlesh Goyal, Bajaj Allianz Life Insurance MD and CEO, and Country Manager of Allianz.
Sud added that surrender charges and quantum and gradients would need to be prudently shaped in the first four years so that it was fair to all policyholders.
“This allows insurance companies to continue to provide adequate protection to the policyholders, which is the core objective of a life insurance policy. Moreover, it allows companies to offer older customers the benefits of life insurance without crossing the cap,” said TR Ramachandran, Aviva India CEO and MD.