The Insurance Regulatory Development Authority of India (IRDAI) has introduced changes to norms of pension plans, ULIPs (Unit Linked Insurance Policies) and traditional life insurance plans. The new guidelines will be effective from 1 February 2020.
1. Change in revival period
As per the new IRDAI guidelines, the time period allowed for the revival of life insurance policies has been increased.
The revival period of ULIPs has been increased to three years. Currently, one is allowed 2 years to revive a ULIP.
For other insurance products, the time period allowed for the revival of policy will be increased to five years.
Revival period is the time from the date of first unpaid premium during which the policyholder can restore the policy before it is discontinued for non-payment of premium.
2. Sum assured
The minimum sum assured for ULIPs for a policyholder below the age of 45 years will be reduced from ten times to seven times the annual premium paid.
Sum assured is the amount paid by insurance company at the death of the policyholder.
3. Premature partial withdrawals
Partial withdrawals to make payments towards higher education, marriage, critical illness, property construction/purchase will be allowed from 1 February. This partial withdrawal will be permitted to the extent of 25 percent of the fund value once the policy completes the lock-in period of 5 years.
Partial withdrawal will only be permitted three times during the entire policy term. On such partial withdrawal, there will be no exit load or surrender charges.
However, partial withdrawals are not allowed on 'Group Unit Linked insurance plans'.
4. Surrender value
Surrender value is the amount a policyholder stands to receive if he/she decides to terminate the policy before its maturity.
As per changes effective from 1 February, if the policyholder decides to terminate his/her traditional life insurance policy, he/she can acquire a guaranteed surrender value after the second year instead of having to wait for three years. After 2 years from its commencement, a fixed sum of up to '30 percent of the total premiums paid less any survival benefits already paid' will be given to the policyholder as the surrender value.
Similarly, one can get '35 percent of the total premiums paid less any survival benefits already paid' on surrendering policy after 3 years. For the 4th to 7th year, the value increases to 50 percent.
5. Withdrawal limit on pension plans increased
Insurance companies will allow policyholders to withdraw a larger lumpsum of 60 percent at vesting, surrender or death, when compared to the current limit of 33 percent (one-third of the corpus).
However, note that in pension plans, only withdrawal of one-third corpus is tax-free and not the entire 60 percent.
6. Guarantee on maturity proceeds on pension ULIPs to become optional
From 1 February, mandatory guarantee on pension ULIP segment will become optional. At present, insurers have to offer guarantees on maturity proceeds, that force insurers to invest in debt instruments to meet the guarantees. This lowers the potential of the return on investment.
After the new rules become applicable, policyholders will be able to decide whether or not they want assured returns.