IRDAI unlikely to tweak 4% interest rate for discontinued Ulips

The regulator is unlikely to offer any relief to insurance companies to stop paying the minimum 4 percent guaranteed return on discontinued funds of unit-linked insurance plans (Ulips).

While the life insurers had written to the regulator in May, sources told Moneycontrol that a tweak in paying the mandatory 4 percent rate of interest is not feasible.

“Policyholders who may have put in all their savings in Ulips will lose out,” said an official. When an Ulip is discontinued by a customer due to inability to pay premiums or for other reasons, the premiums are then put into a discontinued fund where the amount continues to earn an interest of 4 percent.

Ulips have a minimum lock-in period of five years and if policyholders discontinue the product before that, the discontinued fund takes care of the past premiums paid. Once the fifth year is completed, this policy amount on which the 4 percent interest is earned can be withdrawn .

Life insurance companies had citing the falling interest rates to request the Insurance Regulatory and Development Authority of India (IRDAI) to seek phasing out the 4 percent requirement and instead look at linking it with short-term rates.

The monetary policy committee of the Reserve Bank of India (RBI) cut the repo rate by 40 basis points to 4 percent with immediate effect on May 22. Accordingly, the reverse repo rate stands adjusted to 3.35 percent.

The policy rate is now down to 4 percent from 5.15 percent in 2019. This is effectively a 115 basis point reduction, which impacts the ability of financial institutions like life insurers to pay higher returns to customers.

For Life Insurance Corporation of India (LIC), out of the Rs 69,237.27 crore surrender benefits paid in FY19, Ulip accounted for Rs 4,082.23 crore (5.89 percent). In case of the private insurance industry, it accounted for Rs 35,948.72 crore (85.73 percent) in the same period.

Regular Ulip plans indicate a fixed 4 percent and 8 percent returns as illustration benefits. The final rate of return depends on the type of policy and market conditions in equity and debt segments prevailing at the time of claims settlement in an insurance policy.

Amid the lockdown due to the novel coronavirus, or COVID-19, pandemic, policyholders are either opting not to pay premiums for investment plans like Ulips or have deferred plans of buying a new one.

Even if a policyholder stops paying Ulip premiums now, he/she will not be able to withdraw the amount till completion of the mandatory policy term of five years.