New life insurance policy guidelines from February 1: here’s what you need to know

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Changes have been made to the ULIP guidelines and cover areas such as policy stimulus, pension plan withdrawal limits and cash value standards.

The Insurance Regulatory Authority of India (IRDAI) has made several changes to its guidelines on life insurance policies and these will come into effect on February 1, 2020. If you are planning to take out a new policy, it is important to find out how these new guidelines will impact your policies.

According to a Economic period report, changes now made include ULIPs (or unit-linked life insurance policies) and cover areas such as policy revival, pension plan withdrawal limits and cash value standards. The intent of the insurance regulator is to make it more beneficial to you, the customer or, in insurance parlance, the beneficiary.

Buy ULIP reduced to 7 times instead of 10 times the sum insured: The new directive indicates that you can only buy ULIP up to 7 times the premium paid. More importantly, the terms and conditions have been standardized for all age groups instead of those 45 and under being treated differently earlier.

This is seen from two angles. One is the loss incurred by policyholders who gain on tax benefits. The other way of looking at it is that lesser amounts are locked in by investing in ULIPs.

Policy renewal period

People buy policies under certain circumstances and then stop paying the premium. There are provisions to revive these policies if the policy holder starts paying the premium. In the case of unit-linked policies, this period was two years from the date of payment of the last premium. IRDA has now extended this period to three years. For normal insurance policies, the five-year period remains.

Pension plans

The IRDA has made it optional for insurers to offer guarantees on the proceeds at maturity of pension plans. It was mandatory before. The decision has been left to insurers to decide whether they want to promise assured returns. This change will matter to some policyholders who are willing to take the risk and demand higher returns while others may choose to settle for principal protection.

Withdrawal from pension plans

In the case of pension plans, the current rules allow policyholders to withdraw up to 33% of the premium paid before maturity. This limit has been increased to 60% from February 1, but the tax benefit will remain at the level of only 33%. This decision also leaves policyholders with better options in managing their finances.

Changes to Cash Value Standards

The new guidelines announced by IRDA allow policyholders to redeem their policies even after only two years of starting the policy. They won’t have to wait until the end of the three-year period for the insurer to make the payment. Payment standards of 30%, 90% of premiums paid depending on the number of years the premiums have been paid and the surrender of the policy is sought.

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