Now, buying ULIPS will cost less

MUMBAI: Insurance sector regulator IRDA on Monday came out with a set
of guidelines directing life insurers to offer unit-linked insurance
plans (Ulips) at a much lower cost to buyers, while simultaneously
offering higher life cover though with a longer lock-in period.
While life insurance customers will benefit, the new rules could lead
to a substantial cut in commission for insurance agents and force life
insurance companies to drastically cut costs, leading to lower sales,
industry players said.
Interestingly, IRDA's decision to change rules governing Ulips came
within three months of stock market regulator Sebi saying that Ulips
were investment products as well (on which Sebi is the sole authority)
and banning 14 life insurers from selling Ulips without its
permission.
IRDA, on Monday, said that insurers will now be allowed to charge up
to 4% on annual premium paid on Ulips for the first five years, and
thereafter charges will be reduced during the tenure of the policy.
For plans of 15 years and above, the charges will be restricted at
2.25% of the yearly premium.
These cut in charges would make Ulips more attractive to the buyers
since they will have to pay lower charges for the same premium they
paid earlier. In the long run, this will add to the Ulip buyers'
funds. "Lower charges will benefit the customers," said GV Nageswara
Rao, MD & CEO, IDBI Fortis Life Insurance. However, this could mean
lower commission to insurance agents which in turn might affect sales
of ULIPs, Rao added.
The life insurers will also have to cut their expenses and becuase of
lower sales, it may affect their topline as well as bottomline. "The
capping of expenses guidelines have been made very stringent, this
will have quite farreaching consequences for the industry," said
Kamesh Goyal, country manager & CEO, Bajaj Allianz Life Insurance.
"Small regular premium policies will become unviable, thus a large
proportion of people who were paying premium of less than Rs 15,000 or
so a year will suffer badly," Goyal added. There is also fear in the
insurance industry that the new commission structure might not be able
to sustain an insurance agent's income and this channel could suffer.
IRDA has also increased the lock-in period for all Ulips from three
years to five years now, including the top-up premiums.
The decision is expected to make these products more like long-term
financial instruments that can provide risk protection. Longer lock-in
would also discourage those insurance buyers who often entered Ulips,
which are market-linked products, for short term gains. The regulator
also increased the insurance cover on such products to 10 times of the
first-year premium compared to five times now. In its Monday circular
IRDA also said that all pension products should have a guaranteed
return of 4.5% per annum. However industry players feel this could be
difficult to offer. "Providing a fixed guaranteed interest rate could
be a challenge. The returns here should be linked to market-related
rates," said Rao of IDBI Fortis