ULIPs to see 3-year lock-in

The Insurance Regulatory and Development Authority on Wednesday stipulated a lock-in period of three years for investments in unit-linked life insurance products (ULIPs).

The objective is to ensure that ULIPs remain a long-term savings option and put an end to the turf war between mutual funds and insurance companies.

Even though most insurance players offer three- and five-year lock-in periods for ULIPs, some come out with less-than-one-year schemes.

There are 200-odd ULIP schemes in the market and over 70 per cent of the portfolios of new players consist of such products.

Issuing its first regulatory guidelines on ULIPs, the regulator set a formula linking annual premium to the minimum sum assured in ULIPs. This used to be left to insurance players and policy holders.

The regulator has specified that five years will be the minimum policy term. It has also banned withdrawals within three years of commencement of a policy. Partial withdrawal will be allowed only after the third anniversary of a policy for all regular premium contracts and single-premium contracts.

The new norms take effect immediately. IRDA has said that existing ULIP products must be modified by June 30, 2006.

It has directed the players to file modified products for clearance and specified that "as a special case, these products can be used without waiting for 30 days".

IRDA has also made training mandatory for all insurance agents and intermediaries before they are authorised to sell ULIPs, to ensure appropriate market conduct by industry participants.

For this, the Life Insurance Council, a self-regulatory body, has been asked to put in place by March 31, 2006, guidelines on market  conduct, in concurrence with IRDA.

The sum assured for single premium products has been set at 125 per cent of a single premium paid. For non-single premium products, it should be five times the annualised premium or half of a policy term multiplied by annualised premium, whichever is higher.

IRDA said ULIPs must have a guaranteed sum assured, payable on death, and may have a guaranteed maturity value. It also said no loans should be granted under ULIPs.

"Consumers may opt for shorter term policies as they will need to pay a higher premium following the new norms. Ideally, it should be left to policy holders," said Deepak Satwalekar, managing director and CEO of HDFC Standard Life.

Shikha Sharma, MD of ICICI Prudential Life Insurance, said the new guidelines would bring in discipline and demarcate the territories of insurance companies and mutual funds.

AP Kurien, chairman of the Association of Mutual Funds of India (AMFI), said, "Mutual funds had always maintained that ULIPs were being wrongly positioned as an investment product. Full disclosures on fees and expenses, a minimum period for maintaining funds in ULIPs and training of intermediaries will help improve services to customers."

Kotak Mahindra Old Mutual Life Insurance Managing Director Gaurang Shah said the new norms would ensure what the insurance industry stood for — long-term savings, financial protection and mortality.

The guidelines have provided the applicability of net asset value (NAV) in respect of applications for surrender, maturity claim and switch-out. The charges for premium allocation, fund management and mortality have also been specified.

IRDA has also suggested that life insurers go in for voluntary rating of ULIP funds in order to have an independent evaluation of their performance.