By making it mandatory, Irda is defeating the very purpose of buying such a plan

The Insurance Regulatory and Development Authority (Irda) seems to be in a hurry to prove that unit-linked insurance plans (Ulips) are pure insurance products, however similar they may look to mutual funds. But with the latest circular dated May 3, 2010, it has actually weakened its position. Before we come to the gross blunder that the circular commits, let us look at the flip-flop Irda has done on the matter in the last five years.

In its circular dated December 21, 2005, Irda laid down the ground rules for Ulips. The document, titled "Guidelines for Unit Linked Life Insurance Products", is a comprehensive manual on design and delivery of Ulips, for which Irda deserves kudos. The document is not only extensive but also well thought out and unambiguous.

In para 1.2 of the guidelines, Irda very clearly mandates that all "non-single premium" Ulips shall carry "minimum sum assured" (minimum amount payable on death of the life assured) of at least 5 times the annual premium or half the annual premium multiplied by the term of the policy, whichever is higher. The purpose of this requirement is to prevent the Ulips from being turned into investment products under the garb of insurance policies. But, very prudently, Irda added a proviso at the end of para 1.2: "In respect of products under pension and annuity business, para 1.2 is not mandatory."

Later Irda amended this guideline to plug the loop holes therein and curb adulteration of Ulips. By circular 061/IRDA/ Actl/March-2008 dated March 12, 2008, Irda dropped "half times the annual premium multiplied by the term of the policy" and retained only "5 times the annual premium" as the formula for minimum sum assured for non-single premium Ulips. But it did not delete the proviso to para 1.2 of the guidelines, keeping pension and annuity products outside the purview of para 1.2.

The latest circular dated May 3, 2010, however, does the absurd - it deletes the proviso and brings the pension and annuity products under the purview of para 1.2. Why is this absurd? Insurance is about risk. A life insurance policy seeks to offer protection against the risk of death of the life assured - the risk that the death of the life assured may cause financial distress to those who depend on the life assured for their subsistence. The purpose of the "sum assured" of a life insurance policy is that a sum of money may become available to the dependents so as to overcome the financial distress. Sum assured payable on the death of the life assured is therefore the defining element of a life insurance policy. Irda, therefore, was absolutely right in ensuring that all Ulip life insurance policies carry a significant sum assured; because without that they would cease to be life insurance policies.

A pension policy too is about risk; but not about the risk of death. A pension policy seeks to offer protection against the risk of not dying, that is, living too long. Living beyond the age when you can work and sustain yourself is a risk that one carries in the absence of social security or extended family - living beyond this age can cause financial distress to a person. The purpose of the pension is to make available a regular flow of money so as to overcome this financial distress.

When a person buys a pension policy he is paying to transfer the risk of living too long to an insurance company. By thrusting on him a sum assured payable on death, and making him pay for it, Irda is defeating his very purpose of buying a pension. Could anything be more absurd? Irda seems to have got its fundas wrong. Pension does not need to be loaded with "minimum sum assured" to become a "risk product"; it is a risk product by itself.

Source: http://digital.dnaindia.com/