Irda has sought to make the rules governing variable insurance products more transparent. Should you invest in them?
The Insurance Regulatory and Development Authority (Irda) has provided some clarity on variable linked products. An exposure draft on standardised linked insurance products has clarified that their benefits should be partially or wholly dependent on the performance of an approved external index to which they will be linked.
The variable insurance products (VIP) will be required to have a guaranteed interest rate, which will be referred to as a minimum floor rate and also variable interest rates, which will be directly linked to the performance of an approved external index or an external benchmark.
The minimum floor rate, as approved in the ‘file and use’ clearance procedure, will give guarantee for the entire term and be calculated on the balance of the policy account at the beginning of the year and, consequently, at a frequency not less than quarterly.
The exposure draft has also clarified that at each point in time during the period where the policy is in force, after the minimum floor rate is credited, the variable interest rate — as applicable in accordance with the external index or external benchmark, as approved in the ‘file and use’ clearance accorded by the authority — shall be credited to the balance of the policy account value.
In fact, in 2010, Irda imposed a temporary ban on VIPs, which were then called universal life products, because of high agent commission and low transparency. Later, the regulator came out with new guidelines where the expenses were capped at 27.5% of the first-year premium, 7.5% of the second- and third-year premium and 5% for the fourth and subsequent premium. Irda has also made surrender benefits more investor-friendly. If the policy is surrendered in the first, second or third year, the amount would be paid after the lock-in ends. If the surrender takes place during the fourth or fifth year, the policyholder gets 98% of the balance in the account, which will be payable immediately on surrender.
The minimum duration of policy and premium payment must be five years and all VIPs must have a lock-in period of three years. The policy account must be credited with premium net of all charges, and a statement of policy account sent to the policyholder at least once a year. No partial withdrawals are allowed, but the investor is