Life insurance changes set to benefit you

Insurance companies are withdrawing all the non-compliant insurance plans as IRDAI’s new guidelines will come into force from Feb 1, 2020. New insurance plans are expected to offer better benefits & features to the policyholder, but this will lead to an increase in premiums & lower guaranteed returns. The insurance regulator has proposed some changes for its non-linked category of products and ULIPs. Non-linked insurance products are the traditional life insurance plans including endowment and money-back plans. Here the product provides low-risk returns and has a fixed maturity sum plus bonus announced from time to time if the insurer earns profits during its operations for its stakeholders.

The regulatory changes have been brought keeping policyholders’ interest in mind. Let’s understand a few important changes-

Pension Products

  • New pension plans offered by insurance companies will be more customer-friendly as new regulation has made it almost at par with the National pension scheme. A policyholder will be now allowed to withdraw the maximum of 60% of corpus against up from 33% on maturity & up to 25% of partial withdrawal from the pension fund for a specific cause such as education & critical health.
  • The new rules allow freedom to policyholders to decide whether they want the guarantee returns or not. This meant the insurance company is not obligated to invest in a debt instrument, which used to hamper the returns. If policyholders are looking for a long-term investment horizon, they can choose to invest a higher proportion of inequities to create a larger retirement corpus.
  • Policyholders were also not given a choice to purchase annuities from other insurance companies at maturity. But as per new regulation policyholder has an option to use up to 50% of the corpus to invest in annuities offered from another company with higher returns.

ULIP

  • Minimum life cover under ULIP will be scaled down from 10 times the annual premium to 7 times even for those under 45.
  • However, tax benefits under Section 80C and 10(10D) is only offered with a minimum cover of 10 times the premium.

Surrender Value

  • Surrender value is the amount you get in case you make a premature exit. For older policies, this was limited to 30% of premiums paid, which from Feb 1, 2020 has been increased to 35%.
  • For policies with tenures greater than 7 years, its surrender values should increase progressively and converge to at least 90% as the policy moves closer to maturity.

Lapse Policy

  • The inability to service recurring premiums over the long term is one of the key reasons for policy lapse. This might happen due to the regular premium policies that are mis-sold as single premium ones. Genuine financial crunch can also lead to a payment default.
  • The new rule offers some relief as policyholders can reduce premiums by 50% after five years and keep the policy in force. The revival period for traditional plans has been extended to 5 years instead of 2 years currently.

No regulatory changes have been announced for a pure risk term insurance plan.