Unit Linked Insurance Plans (ULIPs) are set to become attractive long term investment plans w.e.f 1st October, with the proposed changes announced by the regulator IRDA. IRDA believes that ULIPs are akin to Mutual Funds with an added insurance cover thrown in. Emphasising on the long term nature of ULIPs, IRDA proposes to increase the lock-in period in respect of ULIPs to 5 years as compared to the existing lock-in period of 3 years.
The regulator had earlier announced capping of fund management charges on all insurance contracts to 135 basis points. The other charges payable by the investors are: premium allocation charge, policy administration charge, mortality charge and charges for additional 'riders' included in the policy. The regulator proposed the overall charges on insurance contracts to be capped at 225 basis points for contracts over 10 years and 300 basis points for contracts up to 10 years. It implies that if the earning of the fund is 15% a minimum return of 12% must be payable to the policy holder. However, keeping in view the nature of an insurance contract, mortality charges have been left out of the overall ceilings announced. The mortality charge varies with the age of the client/investor - mortality charge is higher as the age increases.
As ULIP products directly compete with Mutual Fund schemes, the recent changes in the load structure on MFs (Entry load on MF schemes has been abolished from 1st August 2009) announced by SEBI has prompted IRDA in making the necessary changes in respect of ULIPs, positioning them as a long term investment alternative.
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