Ulips become more investor friendly

Investors in unit-linked insurance policies can look forward to some more transparency. But costs, though not front-loaded, will be spread over the lock-in period.

More important, insurance agents will now have to sell the product as a long-term one, instead of touting it as a product that will give returns based on the stock market.

Guaranteed, but low returns on pension plans: A pension/annuity plan will offer guaranteed annual returns of 4.5 per cent - just 1 per cent more than the savings deposit rate of 3.5 per cent. This rate could change at a later date. Also, partial withdrawals from pension plans will not be allowed during the accumulation phase.

At maturity, one-third of the amount will be commuted. The rest will have to be used to purchase an annuity. The same will be applicable in case a policy is surrendered. Says certified financial planner Gaurav Mashruwala: "Though the rate of return specified in pension plans is low, banning of partial withdrawal is a positive move because buyers of pension plans need to look at long-term planning."

It is not yet clear whether the guaranteed 4.5 per cent is simple interest or compounded. However, financial planners feel the rate of return is low, given that a five-year Reserve Bank of India bond or six-year National Savings Certificate offers eight per cent, .

Medical benefit: What will make a difference is that all Ulips, other than pension plans, will now need to provide either a medical or death benefit. The death benefit has to be 10 times the annual premium as cover for policyholders under the age of 45 and seven times for those over 45. The death benefit will at no time be less than 105 per cent of premium, including top-ups. This is double the five-time annual premium stipulated earlier. Even top-up premiums will get insurance cover.

The medical cover per annum has to be a minimum of five times the annual premium, or Rs 1,00,000 whichever is higher, for someone below 45 years of age. For policyholders above 45, it has to be a minimum of five times the annual premium or Rs 75,000, whichever is higher. "For people with dependents, the need for cover will be much higher. So, one will need to purchase a separate health insurance policy despite this," says Anil Rego of Right Horizons.

Loans on policies: While policyholders cannot partially withdraw from a pension plan, loans can be sanctioned against Ulips. But this amount cannot exceed 40 per cent of the net asset value of those products, whereby the equity component exceeds 60 per cent. In case the debt component exceeds 60 per cent, the loan value is slightly higher, at 50 per cent of the net asset value.

More cost-effective: This has always been a bone of contention when it came to Ulips. Front-loading of the policy may not be possible anymore because overall costs now have to be spread over the lock-in period of five years. At present, most Ulips charge high costs in the first two to three years, thereby reducing the amount actually invested. "The regulator does not want front-loaded charges. That is why they have proposed levelled charges during the lock-in period," says Birla Sun Life Insurance Chief Financial Officer Mayank Bhatwal.

This cost will have to be evenly distributed over the lock-in period. In addition, by capping the net and gross yield at four per cent in the fifth year, 3.75 per cent in the sixth, 3.5 per cent in the seventh and so on, till three per cent in the 10th and 2.25 per cent in the 15th year and thereafter, Irda has capped the costs that could be incurred in the later years as well.