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Policyholders of unit-linked insurance plans (Ulips) with a top-up option might find the going tough in the next few months. Reason: Insurers are confused about the recent guidelines issued by the Insurance Regulatory and Development Authority (Irda). Apart from directing companies to provide a sum assured for retirement products, an Irda circular has mandated acover for top-up premiums, too.

Top-up premiums in a Ulip will now fetch a sum assured of 1.25 (less than 10 years) or 1.10 (more than 10 years) times. "Compulsory protection with every top-up premium has a lot of grey areas and may lead to litigation," said the head actuary with a Mumbai-based life insurance company.

For one, to provide a cover with topup, a lot of extra time and effort will have to be spent on underwriting risks every time a person makes a payment. For example, a policyholder could have been fit when the policy was purchased. But, if he decides to hike the premium after a heart attack, providing additional cover could be a huge risk.

Even costs are a concern. "We cannot conduct medical tests and diagnosis for every small top-up, as it may not be cost-effective," said the insurance official. Further, prior to the new rules, insurers were not required to provided acover if a customer made a top-up of less than 25 per cent of the annual premium paid. Industry sources said that, as a result, none of the companies allowed top-up payments of over 25 per cent. "Usually, companies discouraged high top-ups and kept a cap of 10-20 per cent of the annual premium," said an industry source. Consequently, all the money went into the investment fund.

The new regulations have actuaries confused about the treatment of the additional sum insured that will have to come in with top-up. The case becomes even more confusing, if there are partial withdrawals from the policy after the mandatory lock-in period.

Typically, Irda has mandated that insurance companies have to maintain aseparate account of each top-up because partial withdrawals have to be initially paid from the top-up amount. An example should make this clear. Say, aperson has purchased an Ulip of 10 years with an annual premium of Rs 50,000. He makes a top-up of Rs 10,000 in the second year. If the policyholder asks for a withdrawal of Rs 30,000 in the sixth year, the insurer will pay him in this manner. From a corpus of Rs 3.1 lakh (six premiums of Rs 50,000 + one top-up of Rs 10,000), Rs 10,000 will be withdrawn from top-up, plus 20,000 from his primary policy corpus.

Meanwhile, due to the top-up payment, he already has a cover of, say, 1.25 times the premium. In such a situation, insurers are confused on how the policyholder will be charged for the additional risk and compensated in case of an untimely demise.

"These changes have been made to reiterate that Ulips are insurance products with a key purpose, to cover policyholders," said Anil Singh, appointed actuary and head (product development), Bajaj Allianz Life Insurance Company.

Singh added that for an existing policyholder, top-up premiums would come in handy to increase the cover. More so, because additional cover can be purchased without paying any policy allocation and policy administration charges. The insurer will only deduct the fees (mortality charge) required for the additional cover and the rest of the money will be allocated to the investment fund.

Experts said there could be a few solutions. One, the top-up cover ceases to exist as soon as the partial withdrawal is made. Two, policies with a topup option do not allow for any partial withdrawal. Three, withdrawals can be allowed only from the primary account, and not top-up amount. The latter will ensure the insurer is able to charge the top-up account for the cover being provided.

But, these issues are yet to be resolved. Before these products are launched on July 1, Irda will need to come up with clear guidelines. Importantly, buyers who are planning to purchase such policies should wait till there is more clarity.

ADVANTAGES OF TOP-UP FACILITY

* More risk cover for additional premiums

* Costs are low as there is no premium allocation charge

* Only mortality charges are deducted

* Tax benefits at par with the premium paid

Source: http://epaper.business-standard.com/