To make unit-linked insurance plans (ULIPs) more transparent, the Insurance Regulatory and Development Authority (IRDA) on Tuesday proposed to standardize definitions of lapsing, reviving and surrendering of these policies.
The proposals, if implemented, will curb charges and terms levied on policyholders by life insurers if they default on premium payments.
At present, there is no standard definition on ULIPs’ lapsing.
Ulips—hybrid insurance products that provide life cover and invest part of the premium in stocks and bonds—account for up to 90% of the new business premium of many private sector life insurers.
The insurance advisory committee of Irda has defined lapsing of a policy as when a policyholder discontinues premium payment anytime during the policy tenure due to any reason other than death of the policyholder.
In the absence of a standard definition, many private insurers now either charge policyholders for revival or offer special rebates of free renewal of lapsed Ulips. Moreover, insurers are not mandated to disclose details of lapsation.
Under the proposed norms, policyholders will be given five years to revive a lapsed policy. However, the insurer will have the right to decline revival of the policy.
For every Ulip policy, the insured will be a given a grace period of 15 days for monthly premium payments, and 30 days in all other cases. If the policyholder does not pay the premium within this time, the policy will be termed as lapsed.
However, a policyholder will still be entitled to revive the policy or continue with the policy only to the extent of risk cover. The customer can also choose to either continue with the policy with risk cover and as part of the fund, or to withdraw completely without any risk cover.
The proposals come as Irda and the capital markets regulator, Securities and Exchange Board of India (Sebi), are caught in a legal battle over regulation of Ulips. While a Sebi committee has recommended tightening the net worth and disclosure norms for mutual funds, Irda has been making Ulip norms stricter over the past few months.
“In order to give better understanding of the terms and conditions of the linked products to the policyholders and to provide them an opportunity to make a more informed decision, it is felt that there should be uniformity in the approach on various key parameters of the unit-linked products,” Irda said.
Irda has sought comments on the draft regulations before 27 May.
