How the ULIP will become better with new regulations

Balwant Jain

The Insurance Regulator IRDA (Insurance Regulatory and Development Authority) has notified fresh rules for governing Linked Life insurance products on 8^th July 2019. In this article I will discuss the major beneficial changes proposed in the new regulations for ULIP products, a  Linked Insurance Product.

Enhanced Period for revival of ULIP  policies

When you fail to pay your life insurance premium within the grace period, the risk cover ceases and the policy lapses. Though the life cover ceases on expiry of the grace period, you can still revive your life insurance policy by paying arrears of premium within certain specified period which is called revival period under insurance terminology. Presently for ULIP products the revival period is two years, within which you can revive your lapsed insurance policy. The proposed regulations propose to enhance the time window available to revive your life ULIP product from two years to three years. This extended period will help many consumers to revive their lapsed policies within the extended period, lapsed due to non payment of premiums due to various reasons including the liquidity crunch. The life Insurance companies are mandated not to charge any interest or penalty for reviving the insurance policy.

Requirement for lower life cover in case

Presently the insurance company has to offer minimum insurance cover expressed as number of times of the premium based on the age of the individual. For those who are under 45 years of age, the insurance company has to offer a minimum ten times of the annualised premium as life insurance cover under regular premium paying policies. However for those who are over 45 years of age the insurance company can offer minimum seven times of life cover. Likewise for single premium policies the cover to be offered has to be 125% of the premium for those below 45 years and 110% for those over 45 years. The new regulations propose to do away with the differential minimum life cover based on life. Now the life insurance company has to give minimum seven times of life cover for regular premium paying polices and 125% life cover of the premium in case of single premium policy.

This minimum of seven times of life cover may not work as the income tax laws mandate that any premium paid over 10% of the sum assured is not eligible for deduction under Section 80C. Likewise in case any the premium for any of the year exceeds 10% of the sum assured during the premium paying term, the maturity proceeds do not enjoy the exemption under Section 10(10)(d) and thus the policy holder may have to pay tax on the maturity proceeds received. Since majority of the life insurance policies in India are bought for the sole purpose of tax savings, I feel insurance companies will not be able to offer many produces with a life cover lower than ten times of the annualised premium.

Enhanced proportion available for commutation of Pension Products

In case you have been investing in a ULIP pension product, you are allowed to take out a certain portion as lump sum out of the corpus accumulated in the pension product at the time of vesting which is generally 60 years of age. Presently this is restricted to 1/3 of the amount vested. The new regulations have proposed to enhance this   commutable portion of the amount vested to 60%  from 33.33%. The amount commuted upto 60% will be tax free in the hand of the policy holder at the time of vesting.  The limit has been enhanced to make the pensions products of life insurance companies comparable with the National Pension System(NPS) where subscribers enjoy full tax exemption for 60% withdrawals at the time of maturity, the maximum allowed under the scheme. This enhanced commutable amount will help the policy holder have higher amount in hand to decide himself where to deploy the amount rather than being forced to buy the low yield annuity products from insurance Companies.

Option to buy an annuity from any other insurance Company for pension plans

For the policy holders who have purchased pension plan for accumulation of funds are presently required to purchase an annuity from the same life insurance company from which he has purchased the pensions plan. This was an undue restriction as you are forced to buy annuity from the same company even if the rate offered by it is not competitive. The new regulations have proposed to allow the policy holder to buy an annuity from any other insurance company to the extent of 50% of the corpus to be used for buying the annuity. Since under the proposed regulations the policy holder is now allowed to commute upto 60% of the corpus value and thus only 40% is to be used for buying an annuity. Thus 50% of the 40%  i.e. 20% of the total corpus accumulated can be used to buy annuity from the another Company and with the balance 20% you have to buy an annuity from the same life insurance company.

Partial  withdrawals from ULIP pension policies before maturity

Under the old regulations partial withdrawals were not allowed for pension ULIP policies. The new regulations provide for partial withdrawals from Unit Linked Pensions policies partial withdrawals shall be allowed after completing the mandatory lock in period of five years. The withdrawals will only be permitted for limited purposes like higher education and marriage of children or treatment of self or spouse or for the purpose of buying or constructing a residential house. The maximum amount which you can partially withdraw is restricted to 25% of the fund value at the time of partial withdrawals and no more than three partial withdrawals are allowed during the currency of the policy. The amount of death cover payable on death shall be reduced to the extent of the partial withdrawals made during the two-year period just before the death.

These partial withdrawal rules are similar to those which were introduced for NPS on 10^th January 2018. The insurance regulator has been trying to make the basic features of pensions plans of insurance company similar to those of NPS as regards withdrawals, commutation etc. as both intend to serve the same purpose of accumulation of funds for retirement and buying an annuity on retirement.

The writer is a tax and investment expert and can be reached on [email protected] and @jainbalwant on his twitter handle.

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