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(Strange) Changes In Life Insurance, Pension Plans And ULIPs

Last month, IRDAI (Insurance Regulatory Authority of India) announced various changes in the Life Insurance Policies, Pension Plans and ULIPs (Unit Linked Insurance Plans).

These modifications are supposed to make these plans more customer-friendly.

Unfortunately, some of the amendments don't make practical sense and are rather pointless.

Therefore, as I have repeatedly warned — life insurance policies (except term plans), pension plans and ULIPs were all highly avoidable products — and they continue to remain avoidable.

Detailed below are the recent changes in these products as per IRDAI (Non-Linked Insurance Products) Regulations 2019 and the IRDAI (Unit Linked Insurance Products) Regulations 2019, both dated July 8, 2019.

A. Lower Minimum Life Cover
The insurance companies can now offer endowment / moneyback policies and ULIPs with a minimum life insurance cover of 7 times the Annual Premium; as against 10 times earlier. (Note: ULIPs could earlier also offer a minimum cover of 7 times for those above the age of 45).

Since this will reduce the amount payable towards mortality charges, more premium would go towards investment.

However, this change is inexplicable.

If the cover is less than 10 times the premium, 
(a) you CANNOT claim tax deduction u/s 80C and more importantly
(b) the maturity amount from the policy LOSES its tax-free status u/s 10(10D).

In other words, the insurance policy becomes a TAXABLE product. This defeats the very purpose why most people 'invest' in insurance plans.

In short, practically no one would go for this change.

B. Higher Commutation Under Pension Plan
Presently, 1/3rd of the amount accumulated under a Pension Plan can be commuted; while the balance 2/3rd has to be compulsorily utilized towards buying an Annuity Plan.

Now the amount allowed to be commuted would be 60%.

Again, this is an inexplicable change. 

Only the 33.33% portion of the commuted amount would be tax-free. The balance of 26.67% of the amount would be taxable. This is a huge tax liability.

Again, practically no one would go for this change.


C. Other changes
Few other changes announced are useful, but not very significant in nature. They still do not make these products investment-worthy.

1. Flexibility to choose the Annuity provider
Earlier, you could not change the insurer. You had to necessarily buy the Annuity Plan from the SAME insurer whose Pension Plan you had bought earlier; even if his annuity rates were lower than the others.

This was not a customer-friendly clause and has been amended... but, strangely, only partly.

Now, you have the option to buy an annuity from a different insurer, who may be offering higher annuity amount... but only for up to 50% of the corpus after commutation.

I wonder why IRDAI didn't allow for 100% flexibility.

2. Surrender Value Term
Earlier, the endowment or moneyback type of policies had zero surrender value for up to 3 years. They acquired a surrender value only after 3 annual premium payments had been made.

This has been brought down to 2 years. Now, you can get some amount back, if you decide to close and surrender the policy after 2 years. 

3. Partial withdrawal in Unit Linked Pension Plans
Now, after 5 years of the policy period, you will be able to withdraw
- Up to 25% of the corpus
- Up to 3 times during the policy tenure
- For specified purposes such as critical illness, higher education, marriage, house purchase

4. Longer period to revive discontinued policies
If you don't pay the premium, your policy is discontinued. However, for a limited period, you have the option to revive the policy.

Endowment / Moneyback policies can now be revived up to 5 years and ULIPs up to 3 years after discontinuance. Earlier the revival period was 2 years.

5. Reduction in premium permitted
Insurance policies typically run for 10-25 years. Therefore, it is quite possible that in the future you may face financial difficulties in paying the contracted premium amount.

Now you will have the option to reduce the premium up to 50% (of course, the benefits under the policy will also be reduced commensurately), provided the policy has completed at least 5 years.

Once you opt for the reduced premium, you cannot increase it again.

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