With some many products flooded in the market, we are almost spoilt for choice. However, multiple options often end up confusing rather than enlightening us. We also tend to get attracted to new products thinking that new products would provide us more benefits at lower costs. However, many times we buy a product which doesn’t serve our purpose. We may also waste our money since the product doesn’t meet our requirements.
The same thing happens in case of financial products such as insurance. When you buy an insurance policy you need to act responsibly and make a decision based on your requirements and risk profile. Here, we provide you information on a new category of product—index-linked insurance plan (ILIP)—which is expected to hit the market soon.
Recently, Insurance Regulatory and Development Authority (IRDA) revised product design draft guidelines for traditional products. The latest draft has paved way for a new category of product called ILIPs in life insurance business. At present, life insurance has two categories of products—Traditional plans and unit-linked insurance plans (ULIPs). ILIP would hit the life insurance market soon.
Basic idea
ILIP will have a lock-in period of five years. The premium paying term will be same—like that of a regular premium plan till the policy term or a single premium. According to IRDA draft, an ILIP will be promoted as an unbundled product which means it cannot be sold with any other financial product. Many insurance products are bundled with other products like online booking of air tickets, credit cards, vehicles, consumer durables, home loans or personal loans.
Cost structure & returns
The insurance regulator has recommended levying only mortality (risk cover) charges explicitly. While other charges—like surrender and withdrawal charges—will remain implicit throughout the term of the policy. The account will also show the mortality charges deducted.
ILIP returns will be benchmarked to an index which will allow the policyholder to get a guaranteed value. The benchmark index will be approved by IRDA. ILIPs could be offered as pension products and must give non-negative positive returns. “ILIPs may be offered as pension products, provided the extant pension guidelines are in conformity, such as minimum guarantee of returns throughout the policy term, irrespective of the performance of the index, i.e., non-negative positive return,” the draft guidelines added.
ILIP to operate like bank account
An ILIP will operate more or less like a bank account, with each policyholder having a separately managed account, according to draft regulations. The account value will reflect the premium paid by the policyholder and the interest gained from the particular index to which the fund is linked.
Insurance companies will be required to send a statement of policy account to the policyholder at the end of every reporting period. Minimum death benefit under the new plan will be 10 times the life cover or sum assured.
Surrender charges
If the policy is discontinued and not revived subsequently during the first three years, the surrender value will be the policy account value at the end of the lock-in period (five years) less the applicable surrender charge and will be payable at the end of the lock-in period.
If the policy is surrendered after the first three years, the surrender value will be the policy account value at the end of the lock-in period or on the date of surrender, whichever is later.
To conclude, you should not be in a hurry to buy a new product without understanding its basic structure. Also, never mix your investment requirements with your insurance needs.
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