Insurers asked to extend maturity by 5 years for ULIPs maturing upto May 31; what you need to know

Also, 30-day grace period given for life insurance policies whose premiums fall due in March and April 2020

Kumar Shankar Roy Apr 7, 2020

ulipInsurance regulator IRDAI has directed life insurance companies to extend the maturity by five years for Unit-Linked Insurance Policies/Plans (ULIPs) maturing up to May 31, 2020. This decision has been taken in the backdrop of massive correction in stocks prices over the past few weeks, which has wiped out 34% value from broader benchmarks like Sensex in just three months. Since ULIPs are mostly invested in equities, a market crash affects their value. For those ULIP policyholders who had their ULIPs maturing in the recent past or in immediate future, a 30% drop in fund value will mean returns coming in over 10-15 years will reduce sharply in just a few weeks. Here are five things to know about the move. Read on.

What IRDAI says

The IRDAI on April 4 released a circular. It mentions ‘additional grace period’ for life insurance policies and ‘settlement options for maturity payout of Unit Linked Policies.

On the settlement option, the IRDAI has clearly said that this is onetime option, regardless of whether such option exists or not in the specific product.

Just like the Insurance Regulatory and Development Authority of India allowed additional grace period of 30 days for paying the premium of policies which had their due dates in March and April 2020, the regulator has even allowed the Unit Linked Insurance Plan (ULIP) holders whose policy would mature in March, April or May to postpone the maturity date to up to next five years.

“IRDAI has asked the insurers to offer settlement options to the policyholders in accordance with Regulation 25 of IRDA (linked insurance products) Regulation, 2013 for matured ULIPs whose fund value is to be paid in lump sum. The decision has been taken keeping in mind the expected risks of the sustained fluctuation in the fund value The regulatory body has even directed all the insurers to clearly explain the policyholders the possible downside risk of continued fluctuation of fund value based on daily Net Asset Value (NAV) and have also asked the insurer to take clear consent of the policyholders on their decision,” says Vivek Jain, Head-Investments (Life Insurance), PolicyBazaar.com

You can see the IRDAI circular here.

What is ULIP maturity date?

Maturity date means the date specified in the policy schedule on which the maturity benefit shall become payable to the claimant.

If the Life Assured is alive on the ‘maturity date’, the life insurance company pays the maturity benefit equal to the fund value (plus any other benefit) to the claimant. If they are dead, then death benefit is payable. The fund value is expressed in terms of fund units multiplied with Net Asset Value (NAV).

If this maturity date of an ULIP policy falls in any time period up to May 31, 2020, the five year extension will be given.

Typically, a ULIP has five-year lock-in, though the maturity period duration can be for 5, 10, 15, 20 years etc.

Due to the sharp correction in stocks for the past three months, the fund values of many ULIPs have seen equal declines.

According to Morningstar ULIP data, the best performing largecap ULIP in 5 year period has given just 2.98% return. The best performer midcap ULIP in 5 years has generated 2.55% return. As you can understand, these extremely low returns are due to the effect of the coronavirus-triggered market crash.

Will your consent for maturity extension be taken?

Yes, you will have the final say on taking the maturity date extension. Clear consent will be obtained from the policyholder.

You can always say no, if you expect stock markets not to recover in 5 years time.

You can expect the life insurance company reaching out to you to seek the extension.

What life insurers say

Life insurance companies say that they are happy with the option to offer investors an extend maturity of ULIP policy. Some life insurers had requested IRDAI for the same.

Many customers whose policy matures in April or May 2020, after 10-15 years, would have seen 30-40% wiping out of appreciation. ULIP portfolios are mostly in equity. Deeper cuts are seen in portfolios with midcaps.

Unless the maturity date is extended, some policies would start preparing for redemption of investments and pay the policyholders/claimants the fund value plus any other benefit as per policy terms.

Now the investor has option to extend by 5 year period. He/she can withdraw anytime during this 5 year period.

What if market falls further from here?

This is a risk. If stock market falls 15-20% or more, this will impact the ULIP fund NAV. So, your ULIP fund NAV will also go down by a similar level.

Do remember that keeping money invested in a falling market, means the market losses will be directly transferred to your fund value NAV.

If you do not immediately need the money, stay invested.

The loss in your value value will become permanent only when you redeem the ULIP fund units.

When will the market rise?

Nobody knows when markets rise. This is why there is no point in guessing the dates.

For you as an ULIP policyholder, you want your fund value to rise to its previously high levels. You have to wait and remain patient.

Stock markets rise and fall. Typically, markets take about 3-4 years to reach new highs once a correction is complete.

Hence, an extension of 5 years should help you recover quite a bit of the lost fund value.

Will insurers charge fees on your ULIP during the extension period?

While companies should not ideally charge any fees on these ULIPs, fund management charges may be imposed. If the money is invested in a fund, then the money will be subject to fund management. Fund management charges are about 1%-1.35% for equity funds.

Other charges like policy administration charge (fixed per month/year), switching charges (fixed per transaction) may also be applicable. Life insurers should ease the burden on ULIP policyholders who have taken this one-time extension, and waive all charges.

When the life insurance company seeks permission for ULIP maturity extension, ask them about all the charges that will be applicable on your fund value.

What is a settlement option under ULIP?

The IRDAI has clarified that this is an option to be exercised by the policyholder of a unit linked life insurance policy to receive the maturity proceeds in installments. This option is available only to the policyholder on maturity of the policy.

In case of ULIPs, the investment risk is borne by the policyholder. Normally, on maturity, the number of units available to the credit of the policy will be encashed at the Net Asset Value per unit as on date of maturity. Thus, the maturity proceeds would depend on the Net Asset Value on a specific date, i.e., the date of maturity. Whereas, the settlement option provides an opportunity to the policyholder to encash the units at the Net Asset Value on the date of each installment over a period not exceeding five years, instead of limiting to the value on one particular date.

The frequency of the withdrawal depends on the periodicity made available by the insurer – monthly, quarterly, half-yearly or yearly. The first installment will be paid on the date of maturity.

However, anytime during the 5 years you can opt for the complete withdrawal and the balance units as on the date of option will be encashed at the NAV rate prevailing on that date.

In case of the death of the policyholder during settlement option period, the nominee will be paid the remaining units at the NAV as on the date of intimation of death.

Do note that switching of funds and partial withdrawals are not allowed during the settlement period.

It is purely your choice/decision whether to opt for a settlement option or take the maturity in lumpsum.


Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.

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