The Insurance Regulatory and Development Authority (IRDA) can be the watchdog of the insurance sector in India. The primary aim of the IRDA is to secure the interests of the policyholders. Since IRDA is the statutory body, it can introduce new rules and regulations to enhance the progress of an insurance product, which can eventually lead to the development of the insurance industry in India.
A Unit Linked Insurance Plan (ULIP) can be a combination of investment and insurance, which might have been a part of the insurance industry for a long time now. However, ever since it has introduced in the market, a ULIP plan has been criticised, which decreased its sales in the market. For the growth and awareness of the ULIP plan, the IRDA stepped in and made drastic changes in its financial structure. After IRDA announced the new regulations, the ULIP investment has changed drastically as well as accepted significantly in the market.
Before you pick a ULIP plan, let’s understand the changes made in ULIPs and how they can affect you after the purchase:
- Minimal waiting period
Initially, the waiting period of a ULIP policy was three years, which indicates that you could not surrender your ULIP policy before the completion of three years. Today, you can surrender the ULIP policy after two years as per the new IRDA rules. The shorter waiting period can enable you to withdraw your funds during an unannounced emergency within the family. Although the minimal waiting period can be beneficial, you should ensure your financial goals are met before the completion of two years.
- Low coverage amount
Before the introduction of new regulations, the minimum coverage amount was 10 times of the annual premium until 45 years. Today, the ULIP plan can offer a minimum coverage value, which is seven times the annual premium across all the age groups for a limited and regular premium payment plan. However, the minimum coverage amount for single premium policies can continue to remain 1.25 times of the single premium.
- High renewal period
The renewal period is usually the time within which you can revive your lapsed ULIP policy. A ULIP plan usually lapses when you fail to pay the premium even after the issue of the grace period of 30 days. When your policy lapses, you no longer hold the possession of the ULIP benefits. Therefore, you should revive the ULIP policy within the time frame of two years, which was the initial renewal period. Today, the renewal period of a ULIP policy has been extended up to five years from the date of unpaid premiums.
- Reduction in premium
Under ULIPs, you should pay the premiums regularly in return for the coverage. Since a ULIP policy has a lock-in period of five years, you should continue to pay the premiums throughout the policy to reap the benefits. However, there can be circumstances like the loss of income, physical disability, or critical illness, which can make it difficult for you to pay the premium on time. Failure to pay the premium would lead to the lapse of the ULIP policy, which can result in financial losses. To avoid the termination of the ULIP policy, the IRDA has eased the premium payment. After the new rules, you can reduce your premium by 50% after the completion of five years. That way, you can pay a low premium while you get to stay covered for a longer duration.
As highlighted above, these simplified guidelines can help a ULIP product to penetrate in the insurance market at a larger scale. Along with these changes, the IRDA has also asked the insurance companies to keep you well-informed about a ULIP policy. Therefore, you might receive a ‘benefit illustration’ from your insurers that highlights the revised ULIP charges, benefits, and features. Go through the policy document and the benefit illustration carefully and consult a professional in the case of any doubts.