The Insurance Regulatory and Development Authority has come up with fresh guidelines that are expected to bring some protection and cheer to policyholders of unit-linked insurance plans (ULIPs).

Those who wish to prematurely withdraw now have a reason to be happy as their investments will soon have some protection.

Announcing the norms for ULIPs in a circular on Monday, the Insurance Regulatory and Development Authority (IRDA) has capped charges (reduction in yield) from the sixth year.

These changes, which will be applicable from September 1, 2010, come close on the heels of the IRDA winning the battle on the jurisdiction of ULIPs with the market regulator, SEBI.

“With a view to smoothening the cap on charges, the capping has been rationalised to ensure that the difference in yield is capped from the fifth year onwards. This will not only reduce the overall charges on these products, but also smoothen the charge structure for the policyholder,” Mr J. Hari Narayan, Chairman, IRDA, said in the circular.

So far, the cap was applicable only at the time of maturity.

If anybody pre-surrenders the policy, the return on the investment is dependent on the discretion of the insurer.

The maximum reduction in yield could be between 4 per cent and 2.25 per cent from the annualised premiums paid from the fifth to 15 year of a policy.

Guaranteed Returns

The ULIP policyholders of pension and annuity products will have a minimum guaranteed return of 4.5 per cent per annum on their fund value on the date of maturity.

The mortality or health cover could be offered along with the pension and annuity products as riders, giving enough flexibility for the policyholders to select covers of their choices.

The three-year lock-in period is increased to five years, including top-up premiums. The insurers would have to to distribute the charges in an even fashion during the lock-in period.

More Mortality Cover

Mortality cover has been increased to 10 times, from five times, of the annualised premiums.

Death benefit should not be less than 105 per cent of the premiums paid, according to the guidelines.

For those customers who enter into an insurance contract after 45 years of age, the cover should be at seven times of the annualised premiums.

Last month, the IRDA had said that partial withdrawals were only possible after fifth policy anniversary for all unit-linked products except pension, annuity products, among other changes.

The life insurance industry appears to be a little worried over the new regulations.

Mr G. Muralidhar, Chief Operating Officer, Kotak Life Insurance, told Business Line that the new guidelines would put strain on the capital of the insurance companies while making things “better for the policyholders”.

“All insurers will now need to go to the drawing rooms and redesign their products,” he added.