Tweaking its earlier order on the overall cap on charges, the Insurance Regulatory and Development Authority (Irda) has barred insurers from charging fees on surrender of a unit-linked insurance policy (Ulip) after five years. The regular has said policyholders will be entitled to receive the full fund value on such surrender, once the policy has been in force for five years.

Insurance companies charge a fee from policyholders to withdraw their unit-linked policies once the three years lock-in period ends. Policies withdrawn during the lock-in period compulsorily attract a high surrender charge.

S B Mathur, secretary general of Life Insurance Council, said the move will encourage long-term investments. “Customers w-ho will surrender early will have to pay a penalty. It will also curb misselling of Ulips,” Mathur said.

Irda has also put a cap on fund management char-ge (FMC) at 1.35 per cent, irrespective of the tenure of the policy. In the earlier order issued on July 22, Irda had capped overall charges at 3 per cent of net yield in case of Ulips with tenure of 10 years or below and FMC at 1.5 per cent. Net yield is the return that customer gets on maturity minus charges. In case of insurance policies of above 10 years, Irda has capped total charges at 2.25 per cent, of which the FMC is at 1.25 per cent.

The insurance regulator has also excluded mortality and morbidity charges out of overall charges levied by the life insurance companies on Ulips. The mortality and morbidity charges are responsible for the insurance component in a Ulip and mortality charge defers with the age of the insured person. The industry had been demanding exclusion of these charges from the overall cap.

Insurance companies have approached the Life Insurance Council to remove mortality charges out of overall charges.

Insurers say taking mortality and morbidity char-ges out of overall cap will help insurers to keep Ulips as insurance-cum-investment product and not just an investment product. Debashis Sarkar, senior director and chief marketing officer of Max New York Life Insurance, said, “The exclusion will ensure that there is no compromise on growth in sales of valuable life cover. In addition, the life insurers will not have to resort to cross-subsidisation across all age groups to meet charge cap.”

TR Ramachandran, chi-ef executive officer and managing director of Aviva India, said, “This allows insurance companies to continue to provide adequate protection to the policyholders, which is the core objective of a life insurance policy. Moreover, it allows companies to offer older customers the benefits of life insurance, without crossing the cap.”

K S Gopalkrishnan, chi-ef financial officer & appointed actuary at Aegon Religare Life Insurance, said, “The charges for insurance component are dependent upon various factors, including age of the individual, type of insurance cover and amount of insurance cover. We believe this move also helps the life insurance companies in offering a need-based insurance coverage to the customers within the unit-linked products. The uniform sub-cap on fund management char­ges eases the administrative complexities.”

(With inputs from

Sneha Shah, Mumbai)