Holders of unit-linked policies(ULIP) will in future get more of their money back if for any reason they are forced to surrender their policy within a couple of years.
New norms by the Insurance Regulatory & Development Authority (IRDA) now provide very strong incentive to insurers to ensure that policies do not lapse.
On 25th may 2010, the regulator unveiled new regulations on unit-linked insurance plans, capping the surrender charge on policies that are returned after a year at 15%.
This is a huge benefit for the customer as today there are several plans where the customer gets nothing if s/he surrenders her/his long-term policy after paying the first year premium.
Lets consider an example, If the policyholder paid Rs 100 in the first year, a big chunk of around 40% is deducted by way of various charges. The remaining 60% is allocated to the Ulip fund. If for any reason the policyholder fails to pay the renewal premium, the insured would get back 85% of Rs 60 thereafter, i.e., Rs 51 after the lock-in period.
The maximum surrender charges, which is 15% for first year surrenders, reduces year after year and comes down to 5% for the fourth year and 2.5% for the fifth year.
The new guidelines will benefit customers. It also directly incentivises companies to position their product for long-term and improve persistency. Insurance regulator should allow the development of single premium plans as well as look into the large segment of policyholders, who do not want to commit money for the long term.
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