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Friday, October 22, 2010

IRDA defers sale of universal policies

The Insurance Regulatory and Development Authority (Irda) has suspended sale of universal life policies (ULPs), from the close of business on 22nd October 2010. 

The Authority has received several complaints on the sale practices of the insurers regarding universal life products. After examining the complaints the Authority is satisfied that the universal life products need a better regulatory framework for protecting policyholders' interest. The Authority has circulated draft Guidelines on Variable Insurance Products which will govern all so called Universal Life Insurance Products. Meanwhile, in order to ensure that the policyholders do not lock themselves in current Universal Life Products, it is hereby ordered that the insurers shall not sell any Universal Life Insurance policies from the close of business on 22nd October 2010.

Life Insurers have been asked to give their comments / reaction to the draft guidelines on or before 31 October 2010. This will enable the Authority to issue final guidelines on or before 4 November 2010 and soon after the insurers can file such products for approval.
Guidelines on Variable Insurance Products - Exposure draft 

For the purpose of these guidelines, Variable Insurance Product (VIP) shall be defined as a non- linked life insurance product that provides: 

a) Death benefit equivalent to the guaranteed sum assured plus the balance in the savings account. 

b) Maturity benefit equivalent to the balance in the savings account. 

Under this product, the policyholder shall have the flexibility of changing the sum assured during the currency of the contract subject to a minimum sum assured, as specified in this guideline. In view of this facility and also to ensure transparency, the premium shall be shown separately as Risk Premium, expense, commission and saving components. 

This product shall comply with the existing provisions in the Act, Regulations, guidelines and circulars with regard to the non-linked business and also comply with the following directions.

1. Benefit payable on death: The benefit payable on death shall be the sum assured chosen by the policyholder and the balance in the saving account as on the date of death. 

2. Minimum Sum Assured:

(i) The minimum sum assured in respect of death benefit under this product: 

For age at entry below 45 years: Regular premium including limited premium paying contracts: Rs.50000 or 10 x AP, whichever is higher. 

For age at entry above 45 years: Regular premium including limited premium paying contracts: Rs.50000 or 7 x AP, whichever is higher. 

AP is Annualized Premium selected by the policyholder at the inception of the policy. 

However, the policyholder can vary the sum assured during the currency of the contract, provided the minimum sum assured is fulfilled. Whenever the life cover is changed, the change becomes effective only from the immediately following policy anniversary. 

(ii) No Single premium is allowed under Variable Insurance Products. 

(iii) At age 65, the policyholder shall be given an option to alter the sum assured and the levy of risk premium shall be done only with the prior written consent of the policyholder. 

3. Benefit payable on Maturity: The benefit payable on maturity shall be the balance in the savings account. 

4. Minimum Policy Term: The minimum policy term shall be five years for all individual contracts. 

5. Lock-in period: All Variable Insurance products shall have a lock-in period of three years.
6. Surrender value (SV): 

(i) All these VIP contracts acquire surrender value from the first policy year, however, the surrender value shall only become payable after the lock-in period. 

(ii) The minimum surrender benefit payable will be: 

During 1st year: The policyholder will forego the interest amount on the saving balance.. Hence he / she is eligible for only the amount credited in his / her account, payable at the end of the lock-in period. 

During 2nd year: The policyholder will forego the interest amount on the second year saving balance. Hence he / she is eligible for only the amount available in his / her savings account at the beginning of the second year, payable at the end of the lock-in period. 

During 3rd year: The policyholder will forego the interest amount on the third year saving balance. Hence he / she is eligible for only the amount available in his / her savings account at the beginning of the third year, payable at the end of the lock-in period. 

7. Top-up Premium: The insurer shall not allow any top-up premiums during the term of the contract. 

8. Participating/Non-Participating: 

(i) All the Variable insurance products shall be offered as traditional products in two forms, viz., par and non-par. 

(ii) Under both the categories, there shall be a guaranteed interest rate. This interest rate is guaranteed for the whole term. Both the guaranteed rates must be declared and published in the website at the beginning of each financial year. Hence for all the products sold subsequently will be governed by these rates. In the case of par-contracts, there shall be a bonus, based on performance of investment, expenses and mortality. The bonus declaration shall be governed by Section 49 of the Insurance Act, 1938. It should be noted that the guaranteed interested shall be paid on the annual premium. The annual premium together with the accrued interest in that year will be decreased by the allowable expenses including commission, mortality charges and expenses and that shall be the opening balance in the next year. 

(iii) Hence in the case of par-contracts, at the end of each year, the bonus and the guaranteed interest applicable on the opening balance shall be credited to the savings account. 

(iv) In the case of non-par products, at the end of each year, interest amount on the basis of guaranteed interest rate applicable on the opening balance shall be credited to the savings account. 

(v) For all modes of premium payment (viz., annual, half-yearly, quarterly and monthly) the interest rate shall be credited once a year. 

9. Investments: All the funds invested under Variable Insurance product shall comply with IRDA (Investments) Regulations, 2001 as applicable to non-linked traditional products and relevant guidelines in this regard. 

10. Premiums: The premium shall have four components. 

(i) The first component shall be termed as the Risk Premium which shall be used to provide the guaranteed sum assured payable on death. 

(ii) The second component shall be the expense component. 

(iii) The third component shall be the commission rates offered under the product. 

(iv)The fourth component shall be termed as the savings premium which shall form part of the accumulated fund. 

11. Charges and Commission: The Variable Insurance Products shall levy the following charges: 

(i) Risk Premium, as stated in the policy contract, to provide life cover; 

(ii) Expense component shall not exceed at any point of time the maximum given as: 

1st year: 25% of the first year premium subject to a maximum of Rs 10,000 

2nd year onwards: 5% of all subsequent premium not exceeding Rs 5000 in any policy year 

(iii) Commission under Variable Insurance Products shall not exceed the following: 

1st year: 35% of the risk premium and 2% on the Gross premium less the Risk Premium 

2nd year: 7.5% of the risk premium and 2% on the Gross premium less the Risk Premium 

3rd year onwards: 5% of the risk premium and 2% on the Gross premium less the Risk Premium 

12. Riders: There shall not be any rider attached to this product. 

13. Revival: If due premiums are not paid within the grace period, the policy shall become a paid-up policy. This due date of premium shall be known as date of paid up policy. The policyholder may revive the policy within 12 months from the date of first unpaid premium. 

During this revival period, the life cover ceases. If the policy is not revived during this revival period, then the balance in the saving account, after deduction of the surrender penalty as applicable, shall be credited to discontinuance fund. On this balance, a minimum interest rate of not less than 75 basis points of the respective guaranteed interest rate is applicable. This amount is payable to the policyholder, after the lock in period. 

14. Furnishing Statements of Accounts: Saving account statement shall be issued on every policy anniversary, giving the break up of the opening balance, premium received, deductions towards mortality, commission and expenses, interest added and closing balance.
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