IRDA guidelines and ULIPs

ULIPs also known as Unit Linked investment plans are a perfect combination of insurance coverage and investment options, where investor gets the choice of investing in the stock market. For those of investors who want to get investment returns along with insurance protection. ULIPs come as a boon. Ever since their launch, ULIPs have been a rage among investors and have become a favorite investing tool; thanks to the soaring capital market, that makes it even more alluring.

The insurance regulator, in order to make the functioning of ULIPs more transparent and in tune with investors’ needs, had issued a set of guidelines on operations.

To make ULIPs more insurance centric and prevent them from running on the lines of pure investment products like mutual funds, the IRDA announced a minimum three year lock-in period with an adequate insurance cover. Besides, it also highlighted the need for a long term nature of the product along with a standard method of computing the Net Asset Value (NAV) of the units. Also, the investors had to have a total life cover that was at least five times the premium paid.

In other words ULIPs became more transparent with their focus on insurance. This regulation aimed at retaining the basic characteristics of a life insurance policy. The IRDA also included a clauses stating that sum assured could not be cut back by partial withdrawals till the policy holder turned 60. All these norms were issued to protect the essential element of life insurance cover.

Along with these guidelines for unit linked plans, the regulator also stipulated that once a policy lapsed the policy-holder was not entitled to receive any painvestorts from the insurance company. A policy lapses if the policyholder defaults on the premiums payments in the first three years from the date of issuance of the policy.

IRDA, recently, has come up with a new guideline stating that if a unit-linked policy lapses during the first three years, the policy holder will be eligible for acquiring the surrender value of the policy from the second year onwards. However, this amount will be payable only on the completion of three years. Now, if the policyholder expires during the first three years of the policy term of a lapsed policy, then, the insurer will have to pay the death benefit to the insured, which will be equal to the fund value also called surrender value.

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