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Friday, August 21, 2009

Unit Linked Products- Cap on Charges

Mortality and morbidity out of the overall cap

Unit Linked Plan holders will not face any surrender charges for policies surrendered from the 5th policy year and thereafter and consequently the policyholder will be entitled to receive the full fund value on such surrender, a circular issued by Insurance Regulatory and Development Authority (Irda) declared.

The regulator has also made some changes to the overall ceiling on Ulip charges, which were fixed at 3% of the gross yield. However as a greater relief to insurance companies, Irda has decided to keep mortality and morbidity out of the overall cap on Ulip charges. "Mortality and Morbidity charges may be excluded in the calculation of the net yield", said the circular.

On the clarifications issued by IRDA on cap of charges, TR Ramachandran, CEO & MD, Aviva India said, "We welcome the clarification that mortality charge is not included in the cap. This allows insurance companies to continue to provide adequate protection to the policyholders, which is the core objective of a life insurance policy. Moreover, it allows companies to offer older customers the benefits of life insurance, without crossing the cap."

The circular also stated - the overall cap, the Fund Management Charge shall not exceed 135 basis points irrespective of the tenor of the contract;

Earlier, Irda issued a circular on 22 July 09 prescribing the cap on charges on Ulips. It stated that "This cap is expressed in terms of the difference between the gross and net yield to the customer. The net yield is the gross yield adjusted for all charges. For insurance contracts which are of a tenor of less than or equal to 10 years duration, the difference between gross and net yields shall not exceed 300 basis points, of which fund management charges shall not exceed 150 basis points. For other contracts, i.e., those whose contract period is above 10 years, the difference between gross and net yields shall not exceed 225 basis points, of which the fund management charges shall not exceed 125 basis points".

The circular will come into effect from 1 October 2009 so that all products which are approved by the Irda on or after 1 October 2009 will be governed by the provisions of this circular.

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