Holders of unit-linked policies will in future get more of their money back if for any reason they are forced to surrender their policy within a couple of years. New norms by the Insurance Regulatory & Development Authority (IRDA) now provide very strong incentive to insurers to ensure that policies do not lapse.

Late on Tuesday, the regulator unveiled new regulations on unit-linked insurance plans, capping the surrender charge on policies that are returned after a year at 15%. This is a huge benefit for the customer as today there are several plans where the customer gets nothing if s/he surrenders her/his long-term policy after paying the first year premium.

Consider this example. If the policyholder paid Rs 100 in the first year, a big chunk of around 40% is deducted by way of various charges. The remaining 60% is allocated to the Ulip fund. If for any reason the policyholder fails to pay the renewal premium, the insured would get back 85% of Rs 60 thereafter, i.e., Rs 51 after the lock-in period. The maximum surrender charges, which is 15% for first year surrenders, reduces year after year and comes down to 5% for the fourth year and 2.5% for the fifth year.

Speaking to ET, Bajaj Allianz Life Insurance CEO Kamesh Goyal said: "The new guidelines will benefit customers. It also directly incentivises companies to position their product for long-term and improve persistency." He, however, said the insurance regulator should allow the development of single premium plans as well as look into the large segment of policyholders, who do not want to commit money for the long term. Some insurers say the only way they can adhere to these surrender charges is by either reducing the allocation for the customer - which will make their products unattractive - or by reducing their own expenses.

The only way insurers would be able to reduce the charges is by bringing down the commissions they pay on the first year premium. Henceforth, insurers can hope for a profit only if most policies are renewed. Under the new norms, insurers have to refund the amount under a lapsed policy through a cheque or demand draft to the last known address. Although these regulations benefit policyholders, they will hit the bottomlines of life insurers.

Most companies will now have to rework their break-even dates and some may have to drastically rework their business plans. New life insurance companies, which do not have a distribution network of their own, will be hit the worst. By fixing a ceiling on the surrender charges, IRDA has also taken steps against mis-selling.

Henceforth, if an agent mis-sells a regular premium policy by positioning it as a single premium plan, the life insurance company will stand to lose. If the second year premium does not come in, the life company will have to give back money in the policyholder's account to the customer (after the five year lock-in).

The new norms called 'Standardisation of terms and condition of Ulip and treatment of lapsed policies' issued by IRDA are a part of the new guidelines as an adjunct to the IRDA Act.

They will come into force on the date of their publication in the official gazette and shall apply to all contracts of unit-linked life insurance policies. The regulator has said these regulations supersede earlier ones.

Source: http://economictimes.indiatimes.com/