CIRCULAR NO. IRDA/ACT/CIR/VIP/187/11/2010, DATED 23-11-2010
The structure of insurance policies evolves over time to provide policy holders, a stream of long term benefits. Generally these changes are in response to changes in the overall financial sector as also to be in line with current consumer expectations. Over the past decade, non-linked life insurance products have been recreated to address some of their anachronistic features such as, lack of transparency, high initial business strain etc. Most importantly, these design innovations in Life insurance sector, provide consumers greater flexibility to change the mortality and savings proportions of their insurance policies as individual life stage needs changes. These new variations of traditional products are variously termed ‘Universal Life’ or ‘Variable Life’ policies and these products have gained a substantial share in the market, particularly in the developed markets where they first evolved. It is clear that their popularity is caused by the greater flexibility, transparency and lower business strain, as compared to non-linked conventional type products which hence provide for better returns. A few such products have been recently introduced in India too.
After a careful study of the design of such products in several countries and having regard to the specificities of the insurance industry in India, in particular the concerns of market conduct, consumer awareness and approaches to policyholder protection, the IRDA had circulated an exposure draft of the approach proposed to be adopted in the regulation of such products. Taking into consideration the response and comments received and to address the relevant concerns, the Authority issues the following guidelines :
1. Universal Life products shall be known as Variable Insurance Products (VIP).
2. All VIP shall only be offered under non-unit linked platform and shall not be permitted on unit linked platform.
3. VIP shall be defined as a Non- Linked Life Insurance product that provides :
(a) A Death benefit equal to the guaranteed sum assured plus the balance in the policy account.
(b) A Maturity benefit equal to the balance in the policy account together with a terminal bonus, if any, as applicable
4. Every policy shall have a corresponding policy account whose balance shall depict the accrual to the policyholder. The policy account shall be credited with premium net of all charges. The guaranteed rate and bonus shall be applicable to the balance of the policy account. The statement of policy account shall be sent to the policyholder at least once a year.
5. VIP shall only provide mortality cover, no other contingency shall be covered other than death. The sum assured shall at least be ten times annualized premium.
6. The policyholder shall be offered flexibility of changing the sum assured during the currency of the contract subject to a minimum sum assured as approved in the F&U clearance accorded by the Authority. When the sum assured is changed, such change will be effective from the immediate next policy anniversary.
7. No group insurance contract is allowed for these products at this stage.
8. These products shall have the following features :
(i) Benefit payable on death: The benefit payable on death shall be the sum assured chosen by the policyholder together with the balance in the policy account as on the date of death.
(ii) Benefit payable on Maturity: The benefit payable on maturity shall be the balance of money in the policy account plus the terminal bonus (if any), as applicable.
(iii) Only level regular premiums will be permitted in these policies. Single premium or Limited premiums shall not be allowed.
(iv) The premium shall be shown separately as risk premium, charges, commission and policy components.
(v) The minimum policy and premium payment term shall be five years.
(vi) All Variable insurance products shall have a lock-in period of three years.
9. All the VIP shall prescribe a surrender value which shall not be more than as specified in the Table 1 below :
|Policy Year||Minimum Surrender benefit payable|
|During 1st/2nd/3rd year||The balance in the policy account will be frozen on the date of surrender and this balance shall be payable at the end of lock-in period without debiting any further expenses or crediting any further interest.|
|During 4th and 5th year||If the surrender takes place during the 4th or 5th policy year, the policyholder is eligible for 98 per cent of the policy balance available in his or her account. This amount is payable immediately on surrender.|
|After 5th year||The amount available in the policy account as on the date of surrender and is payable immediately on surrender.|
10. Top-up premium: Top-up premium is allowed throughout the term. At any point of time during the currency of the contract, the total top-up premium paid shall not exceed the sum total of regular premiums paid at that point of time.
11. Partial Withdrawal: No partial withdrawal shall be allowed under this product. However a loan amount of not more than 60 per cent of the balance may be extended at a rate of interest as approved in the F&U clearance accorded by the Authority.
12. All VIP shall be offered as traditional products either as participating or non- participating, as per the current practice.
13. Non-participating VIP : The product must have a guaranteed interest rate, referred as minimum floor rate. This minimum floor rate, as approved in the File and Use clearance accorded by the Authority, shall be guaranteed for the whole term and shall be calculated on the policy account. The insurer may also declare an additional investment return at periodical intervals.
14. Participating VIP : The product must have a guaranteed interest rate applied on policy account. This guaranteed investment return will be declared at the start of the policy term and will continue throughout the term of that policy. The company shall also declare bonus rates at the end of every financial year in accordance with section 49 of the Insurance Act, 1938 and other regulations and directives of IRDA as applicable to participating (also known as ‘with profits’) products.
15. (a) For all modes of premium payment (viz., annual, half-yearly, quarterly and monthly) the additional interest rate (for non-par) or the bonus (for par) shall be declared once a year (immediately after the annual actuarial valuation i.e., as on March 31st of each year) which is to be credited to the policy account in the manner as specified in clause 4; (b). the guaranteed rate shall be credited to the policy account at least on quarterly basis.
16. The insurer shall keep a separate account of all receipts and payments in respect of this product. The valuation of assets and liabilities shall be in accordance with the IRDA (Assets, Liabilities and Solvency Margin) Regulations, 2000.
17. Premiums : The premium shall comprise the sum of the following four components :
(i) The first component shall be termed as the Risk Premium which shall be used to provide the guaranteed sum assured payable on death.
(ii) The second component shall be the expense component;
(iii) The third component shall be the commission rates offered under the product;
(iv) The fourth component shall be termed as the policy premium.
18. Expense component and commission component together shall not exceed at any point of time the maximum given in Table 2 :
|Year||Maximum expense (including commission )|
|1st year||27.5% of the first year premium|
|2nd and 3rd year||7.5% of second and third year premium|
|4th year onwards||5% of the 4th year and subsequent premium|
|On Top-up premiums||3% of the top-up premium|
19. Riders: There shall not be any rider attached to this product.
20. If due premiums are not paid within the grace period, the policy shall become a paid -up policy. This due date of first unpaid premium shall be known as date of paid up policy. The policyholder may revive the policy within 12 months from the date of first unpaid premium. During this revival period, the life cover ceases.
21. Furnishing Statements of Accounts: Policy account statement shall be issued at the end of each financial year to the policyholder giving the breakup of the closing balance, premium received, deductions towards mortality, commission and expenses, minimum floor interest earned, additional interest earned or bonus declared and added and closing balance in the manner prescribed in the Annexure attached to this circular.
22. Disclosure: The products shall not be sold as universal life or unit-linked products. The promotion architecture and the key features document to be sent to all prospective policyholders shall disclose, apart from whatever else may be specified from time to time, the following:
(i) Guaranteed minimum floor rate
(ii) Sum assured
(iii) Premium paying term
(iv) A clear disclosure of the premium showing the four components separately
(v) Lock in period and the treatment of monies during lock in period in the event of surrender
(vi) Interest rate on loan, if applicable
(vii) A declaration that this is a non linked insurance product
23. All existing individual products which have a separate and identified savings component shall be refilled with the Authority in accordance with these guidelines and fresh approval is to be obtained.