With the inter-regulatory spat
over ULIPs being firmly
settled in its favor, IRDA has taken very little time in
announcing sweeping new regulations that will change the very essence of how
ULIPs are structured and sold today.
So what are the significant changes and how will it change the way
ULIPs are sold. The changes are both from the regulator side as well as the
proposed changes in the DTC that will become effective from April 1, 2012.
First let's look at what the current draft of the DTC says.
Under the DTC, all receipts from any life insurance policy is treated
as income. However, full deduction is allowed for any receipts from a life
insurance policy if the amount is received at the completion of the original period
of contract or death and the capital sum assured is at least 20 times the
premium payable in any year.
In simple words, it means that under the DTC (effective March 2012) tax
exemption will be available for sums received under the insurance policies only
if those sums are received on maturity (or earlier on death) and also if it has a
certain minimum level of death protection. Since tax is a major driver for buying
insurance policies (a rather unfortunate situation) this single change itself
will make sure that any potential mis-selling around the tenure of the policy will be
limited. It is quite possible that unless the amounts are paid on maturity or on
death there might be TDS on the sums paid out on premature withdrawals—thus
making them less attractive. Combine this change with the fact that a
five-year compulsory lock in period introduced by IRDA, will make sure that this is
perceived as at least a five-year product. In the other very significant change,
IRDA now requires charges to be spread over the first five years (and not front
loaded as is the case currently) and has additionally introduced a maximum
spread of 4% between the gross yield and the net yield at the end of five years.
These two changes when combined will ensure that the commission structures
and other charges are kept reasonable.
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