Policy Check. Did you know life insurance rules have changed?

IRDAI (Insurance Regulatory and Development Authority of India) issued a notification on new regulations in ULIPs (unit linked insurance plans) and traditional insurance policies, a few weeks back. Of the several changes, the move to reduce the minimum sum assured (SA) in ULIPs and a guaranteed surrender value for traditional policies from the second year, were prominent.

Here is a detailed analysis of the new rules and their impact on those who buy life insurance.

Reduced life cover for ULIPs

If you are eyeing smart returns from the equity market and want to buy ULIPs in future, watch out for life insurance cover. While the mandate for insurance companies on ULIPs is to offer a minimum SA of 10 times the premium, currently, the ULIP Regulations, 2019, has brought it down to a cover of seven times the premium. Insurers can choose to offer a higher SA, but what is mandatory now is only seven times the premium. There are two implications of this move of reducing SA on ULIPs.

One, you may fall short of life insurance cover and would have to consider enhancing risk protection through another policy. Two, returns on your investment in the ULIPs can go up. This is because mortality charge, which is based on the SA under the policy and deducted from the premium that is invested, will reduce.

However, note that the taxman still holds onto the old rules. There will be tax benefits on the maturity amount of a ULIP for a policyholder under Section 10 (10 D) of The Income Tax Act, only if the SA is at least10 times the premium. If your policy’s SA is seven times, you will end up paying tax on the maturity amount. So, decide what you want — higher returns every year, or paying tax at the slab rate when the policy matures.

In the case of single premium ULIPs, the new regulation, however, has given a mandate for increasing the cover.

The minimum cover to be provided in ULIPs for single premium policies will henceforth be 1.25 times the premium. Under the old regulation, for policyholders who entered below 45 years, the minimum SA to be provided was 1.1 times the premium; the mandatory SA was 1.25 times only for those who were of age 45 years or above.

Surrender benefit

In traditional life insurance policies, though IRDA didn’t act upon the high commission rate (allowed to agents), it has brought about a few policyholder-friendly moves.

While until now, a guaranteed surrender value (GSV) on these policies was given only from the third year, with the IRDAI’s Non-Linked Insurance Products Regulations, 2019, policyholders can receive the benefit right from the second year. The GSV will be at least 30 per cent of the total premiums paid, minus survival benefits already paid (note, you still lose 70 per cent of the premium paid), if surrendered during the second year of the policy, and at least 35 per cent of the total premiums paid, minus the survival benefits already paid, if surrendered during the third year of the policy. The GSV increases to a minimum of 90 per cent of the total premiums paid, if surrendered during the last two years of the policy.

The other move that will be beneficial for policyholders is the change with respect to pension policies. In case you buy a pension policy in the future, you can commute (amount of money withdrawn as lump sum) a higher amount. While currently only one-third of the total sum can be commuted and the balance converted into an annuity, the new regulation permits individuals to commute up to 60 per cent of the maturity amount just like NPS (national pension system). Further, it allows you to invest at least 50 per cent of the amount in annuity schemes provided by other insurers. But the tax rules haven’t changed here too. As per the existing IT rules, only one-third that is commuted will be exempted from tax. If you draw 60 per cent, half of it may be taxed. There is no clarity on this as yet, say tax experts.

Further, the minimum SA in traditional non-linked policies is also seven times the premium, irrespective of the age group (below 45 years or 45 years and above). While earlier, only a two-year period was given to revive a lapsed traditional policy, it can now be renewed in five years.

There is also now relief for policyholders who have been mis-sold a policy and who do not want to keep coughing up a high premium every year. The new regulations allow insurers to give an option to policyholders to decrease premium up to 50 per cent for reduced benefit after the fifth year.