How the Changes in Life Insurance Policies Impact You?

Introduction

The Insurance Regulatory and Development Authority of India (IRDAI) has recently announced the new rules for Life Insurance Policies. Lets see how these changes in life insurance policies will affect buyers.

New Rules For Life Insurance Policies

Life insurance products are undergoing major changes which are mostly to the benefit of policyholders. IRDAI has released the new rules for life insurance policies. Lets discuss the updated regulations :

New Rules For Life Insurance Policies Released By IRDAI
New Rules For Life Insurance Policies Released By IRDAI

1.Life Cover in Ulips

  • As far as life cover in the ULIPs front is concerned, the minimum cover offered was 10 times the annual premium earlier. Now, this minimum life cover in ULIPs is going to come down to 7 times from 10 times to those under 45.
  • At present, insurers have to offer a minimum cover of 10 times the annual premium to those under 45 and 7 times to those over 45. For policyholders who are not keen on the protection element, smaller cover will mean lower mortality charges. 
  • A higher proportion of premiums will be directed towards investments. However, one should note the important point that to maximise tax benefits under Section 80C and 10(10D), the life policy has to offer a cover of at least 10 times the annual premium. For policies with 7 times cover multiple, tax breaks under 10(10D) would not be applicable.

2.Maximum Lump sum Withdrawal

  • The maximum withdrawal allowed at maturity under pension plans has been increased from one third to 60%.
  • However, this will not bring insurance pension plans at par with the National Pension System (NPS). In NPS, the 60% withdrawal allowed at maturity is tax free.
  • In pension plans, 60% withdrawal is allowed now but withdrawal of up to one third of the corpus would be tax-free, anything above that is taxable.

3.Minimum term for acquiring surrender value in traditional plans

  • Now, you are not required wait 3 years for your policy to acquire a guaranteed surrender value. Surrender value is the amount you will receive if you decide to exit prematurely.
  • Irrespective of premium paying terms, policies will now acquire the minimum guaranteed surrender value if they have paid at least 2 years’ premiums now, against 3 years earlier for policies with a premium paying term of over 10 years.

4. Freedom to choose annuity provider

  • Annuity is regular, guaranteed pension income payable to the policyholder from the date of vesting till death.
  • In the new rules, Annuity purchase conditions, too, have been liberalised. Currently, a policyholder has no choice but to purchase annuities at maturity from the insurer who has issued deferred pension plan.
  • But now, policyholders can approach insurers offering higher rates for 50% of the corpus. Thus, Open market for the option of purchasing annuity, up to 50% of the investible corpus would be a key change.
  • In earlier condition, a lack of competition used to hurt policyholder interests, as they cannot shop around for higher annuity rates. However, the Relaxation of this restriction will allow policyholders greater flexibility to seek better rates 

5. Flexibility in asset allocation in pension Ulips

  • As of now, insurers have to give a guarantee at the vesting date. Here,guarantee means insurers have to invest largely in debt products and are not able to generate higher returns.
  • But now, this is optional and policyholders can now decide whether they want assured returns or not. Those in the younger age brackets who can stomach risks and afford to stay invested over the long-term can choose to deploy funds in equity. 
  • The change that is likely to make the maximum impact pertains to unitlinked pension segment, which lost steam after insistence on guarantees and purchase of annuities from the insurer who issued the deferred pension plan.

6. Direct premium payment for Ulip riders 

  • Currently, Premiums for riders like accident or disability benefit accounted for by cancelling units.
  • According to the new rules, direct premium paymeny for ULIPs riders is introduced. Direct premium payment means a larger proportion of base Ulip premium is invested.
  • Also, the regulations also provide policyholders the flexibility to reduce their premium after the 5th policy year.
  • Being long-term products, insurance premiums have to be serviced annually and any financial crunch around the premium paying date can result in policy lapsation. Instead, now you can reduce your premiums by 50% and still keep the policy in force. 

7.Extended Revival Period

  • Revival period is the period offered by insurers to revive the policy after you missed paying the premiums after the policy lapses and also during the grace period.
  • The revival period has been increased to 3 years in case of ULIPs and 5 years in case of non-linked products from 2 years.
  • The extension in the revival period will provide you a wider window to revive their policy. Also, with the increase in duration, you will get some flexibility in policy premium payment.

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