In India, life insurance products have largely penetrated in the markets. According to a report in 2018, over 65% of Indians purchase life insurance for their financial well-being in the long run. While different life insurance policies are making their way in the Indian market, the Insurance Regulatory and Development Authority of India (IRDAI) isbringing about various changes in them. These life insurance regulatory changes apply to a Unit Linked Insurance Plan (ULIP) and non-linked insurance products like money-back plans or endowment policies.
Before purchasing a ULIP plan, let’s understand what is ULIP in brief:
A ULIP policy is a dual-benefit financial product, which offers investment and insurance. In addition to this, it provides tax-saving benefits on premiums as well as maturity payout under Section 80C and Section 10(10D) of the Income Tax Act, 1961.
The life insurance regulatory changes are designed, keeping your financial needs in mind. With these changes, you can receive not only high benefits but also maximum flexibility. Therefore, let’s take a look below to understand how these top seven life insurance regulatory changes have affected ULIP investments:
As a policyholder, you should consider your age and financial goals before investing in a ULIP policy. You should invest in equity funds when you are ready to take risks and stay invested for a longer duration. It is said that the earlier you invest the better are your chances to maximise returns as you are in a better position to deal with initial market risks. Ideally, people between the age brackets of 20-25 should deploy their funds into equities since they can bear risks.
Under a Unit Linked Pension plan, you can withdraw 60% amount to the maximum at maturity. While you can withdraw 60% of the total amount, the remaining one-third amount would be tax-free. Besides, the IRDAI has also made few changes in the partial withdrawal system. When it comes to partial withdrawal, you can withdraw only 25% of the fund value and thrice during the tenure of the ULIP policy.
Annuity plans offer guaranteed pension income, which you can receive from your vesting date until your death. The IRDAI has made changes in annuity purchase to ensure you receive maximum flexibility while receiving better returns. As a policyholder, you should buy an annuity from your insurer at the time of maturity.
A ULIP investment is a flexible option. Tarun Chugh, the CEO and MD of Bajaj Life Insurance, was quoted saying, ‘The regulation also provide policyholders with the flexibility to reduce their premium after the fifth year of the policy.’ As a policyholder, you can reduce your premiums approximately by 50% and continue the policy tenure in the long run. The primary reason for the reduction in the premium is to ensure yourinability to pay premium in the future due to an emergency does not lead to the lapse of the ULIP policy.
After the new life insurance regulatory changes, you would receive a minimum coverage amount, which is seven times the annual premium. While your insurer would currently offer ten times of the annual premium to people less than 45 years, it is essential to provide seven times of the annual premium to people over 45 years. A ULIP policy with seven times coverage of the annual premium would not be eligible for tax deductions under Section 10(10D) of the Income Tax Act, 1961.
When you don’t pay the premiums, your ULIP policy lapses. If you wish to continue receiving the ULIP benefits, you should revive your ULIP policy. In case you want to revive your ULIP policy, you don’t have to worry about it before two years. After the life insurance regulatory rules, you can revive your ULIP policy within a time frame of three years.
7.Short surrender period
When you purchase a ULIP, you no longer have to wait for three years to receive a guaranteed surrender value. After the introduction of new rules by IRDAI, you can receive a minimum guaranteed surrender value if you have paid a premium for at least two years. For instance, if you have paid two premiums, you are eligible to receive approximately 30% of the guaranteed surrender value.
To sum up, these significant changes mentioned above on ULIPs came into effect from December 1, 2019. The IRDAI-suggested life insurance regulatory changes have been announced to make your lives easier as well as ensure your favorability while investing.