How The New ULIPs Have changed For The Customers

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Amendments are very common and frequent if we talk about the insurance sector. The latest amendments can be seen in the ULIPs. The ruling body IRDAI has brought several changes in the features of the ULIPs for the betterment of the policyholders as well as some decisions are in favor of the insurance companies.

The changes are with respect to the minimum sum assured, the guaranteed surrender value benefit, the time duration for the renewal of the policy, and the pension policy.

Further elaborating on the mentioned changes lets come on to:

Life Cover Reduced

Earlier under the ULIPs, it was compulsory for the insurance companies to offer a minimum sum assured 10 times that of the premiums but according to the new regulations it has been reduced to 7 times that of the premiums paid. The insurance companies can offer high sum assured but with a limitation of maximum 7 times that of the premiums.

As an effect, investors who are planning to invest in ULIPs for lucrative returns from the equity market should be aware of the fact. The changes in the minimum sum assured can have two inferences:

  1. Under such a policy one may fall short of life insurance cover and may have to buy an additional policy for enhancing the life cover.
  2. Returns on the investment in ULIPs can rise. It is because of the fact that the mortality charges (which depend on the sum assured as per the policy and cut down from the premiums) will reduce.

Due to changes in the ULIPs the investors have a concern about taxation. So, let’s see:

What Is The Effect On Taxation?

The tax benefits have not changed. They have the same rule even after changes in the ULIPs policies. The maturity amount is tax exempted under section 10 (10D) if the sum assured is at least 10 times the premium.

NOTE: If the sum assured is 7 times that of the premiums than tax is to be paid on the maturity amount.

Is There Any Effect On Surender Value?

The changes in the plans have affected the guaranteed surrender value as before there was a provision under which according to IRDAI the policyholder could receive the benefit of guaranteed surrender value (GSV) only from the third year but according to the amendments od IRDAI’s Non-Linked Insurance Products Regulations, 2019, it can be received from the second year itself.

Here are the parameters based on which the GSV is calculated:

  • If surrendered during the second year of the policy:
  • GSV = 30% of Total Premium Paid - Paid Survival Benefits

(70% of the premium paid is lost.)

  • If surrendered during the third year of the policy:
  • GSV = 35% of Total Premium Paid - Paid Survival Benefits

NOTE: In case of surrender in the last two years of the policy here are the GSV calculations:

  • GSV rises to 90% of Total Premiums Paid and even more.

Another Benefit To The Policyholders In Form Of Pension Policy

  • Under the pension policy updates, the investors could commute (Lump-sum Withdrawn amount) only one-third of the total sum and the rest balance amount will get transformed into an annuity.
  • The new amendments allow to commute 60% of the maturity amount similar to that of the National Pension System. There is a flexibility to invest up to 50% of the amount in annuity schemes launched by the insurers.
  • What About Policy Revival?

According to IRDAI updates, there are changes in the revival of a lapsed policy. The revival time duration after the lapse of the policy was 2 years but, now it has been extended to 5 years.

A relief has been brought to the policyholders who have been mis-sold the policies. They can reduce their premiums up to 50% after the fifth year but on the condition of reduced benefits.

Conclusion

The amendments brought in the ULIPs have brought several add-ons. All you need to do is be vigilant and go through the changes made thoroughly, so that, you can do exact calculations of your profit and loss.

By Naval Goel( CEO & Founder of PolicyX.com)

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