IRDA’s directive is a good option for the insured, but why was it omitted in the new ULIP guidelines in the first place? Will IRDA bring back ‘cover continuance’ too? The industry gains—ULIP revival benefits a life insurance company due to capped surrender charges coupled with the fund management charge of 0.5% on a discontinued fund

The Insurance Regulatory and Development Authority (IRDA) has mandated insurers to allow policyholders to revive ULIPs (unit-linked insurance plans) within two years of the last premium paid, but not after the lock-in period of 5 years has expired. It is a good move for both the insurance company and the insured, but the same was offered in ULIPs sold prior to the regulatory changes of 1 September 2010. But the new regulations do have something in store for both the insurer and the insured.

Insurance companies will benefit; IRDA has allowed them to charge 0.5% fund-management charge on the discontinued fund. This in effect negates the benefit offered to the customer (the increase from 3.5% to 4% return) on the discontinued fund.

The request to allow revival of ULIPs post 1 September 2010—up to two years of discontinuation—was made by insurance companies. They had little to gain with discontinued policies, as the surrender charges were capped to a small sum under the new IRDA regulations. Insurance companies are finding it hard to sell new ULIPs, due to drastic reduction in the first-year commission for agents. The only way to make up for lost commission for agents is to improve persistency ratio by chasing customers for renewal premiums.

Under the old ULIP regime, surrender charges were unreasonable and hence insurance companies (in many cases) did not bother if a customer renewed a policy or not. The revival period of two years in old ULIPs is mentioned in the fine print in a few product brochures. If you did not know about this clause, there may still be time to revive your policy.

Girish Malik, vice-president-life insurance, Nandi Insurance Broking told Moneylife, “Under the new ULIP regulations, surrender charges are capped and hence the extended period of two years for revival (in old ULIPs) may have been dropped in the new IRDA regulations. The changes will allow customers of ULIPs sold after 1 September 2010 to revive the policy if they have missed out on the opportunity to renew the policy for some reason.”

Insurers will have to refund the discontinuance charges on revival of the policy. The insurer may attach conditions or raise the premium. It may involve medical tests in some cases—considering the age factor, size of cover and the gap in premium payment. In short, the revival will happen on the terms laid down by the insurance company.

‘Cover continuance’ was another feature in old ULIPs, which got dropped in new ULIPs. Can IRDA allow this feature for new ULIP too? Under this clause, if one is not able to pay premiums anytime after the first three years (the lock-in period), the policy would not lapse and the life cover continues. The funds invested in equity/debt will continue to remain invested in the policy. The life cover sustains because of the mortality charges that continue to be deducted from your fund value along with other charges as per the policy contract. It ensures that the sum assured is payable in the event of the policyholder’s demise, even if all the premiums have not been paid.

According to Arvind Laddha, chief executive officer, Vantage Insurance Brokers and Risk Advisors, “Both the insured and insurer will benefit from the IRDA changes to the ULIP guidelines. The revival of ULIPs up to a period of two years will help to restart any discontinued policies. The insurer benefits with increase in persistency ratio and 0.5% fund management charge on the discontinued fund.”