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IRDA Caps Unit-Linked Products
July 23, 2009

IRDA has released a circular mandating an overall cap on all charges of Unit-linked products put together. The circular shall be effective from 1 October 2009. The existing products should meet the requirements of this circular by 31 December 2009.

Author : Dhanashri Rane

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In an initiative to bring in more transparency, retain the appeal of Unit Linked Insurance Policies (ULIPs) amongst investors and help them take an informed decision, IRDA released a circular mandating an overall cap on all charges put together. The circular shall be effective from 1 October 2009. The existing products should meet the requirements of this circular by 31 December 2009.

The previous circular released in 2005 had provided guidelines and clarified the charges applicable on ULIPs. The charges on ULIPs included Premium Allocation Charge, Fund Management Charge, Policy Administration Charge, Surrender Charge, Switching Charge and Mortality Charge. The presence of numerous charges makes it difficult for a customer to even evaluate two ULIPs. In order to reduce the complexity of charges, in the new circular, IRDA has made it compulsory to include a signed customer-centric-benefit illustration. This illustration will be a part of the policy document and can assume an annual growth rate of 10%. Also, the illustration has to be approved by IRDA. However, insurers are free to distribute these charges across the term of the policy.

IRDA in the circular clearly mentions “Hence to encourage long term business and enable policyholders to earn additional returns thereby and taking into account the product features and the current cost structure, it is mandated that the cap on charges will be based on the difference between gross and net yields of any product. The net yield is the gross yield adjusted for all charges. For insurance contracts which are of a tenor of less than or equal to 10 years duration, the difference between gross and net yields shall not exceed 300 basis points, of which fund management charges shall not exceed 150 basis points. For other contracts, i.e., those whose contract period is above 10 years , the difference between gross and net yields shall not exceed 225 basis points, of which the fund management charges shall not exceed 125 basis points. It is relevant to note that in many markets across the world the Regulators have prescribed gross and net yield to the customer for ULIPs.”

Apart from this the circular has explained that “At the time of maturity, the insurer must issue the policyholder a certificate showing year-wise contributions, charges deducted, fund value and final payment made to the policyholder taking into account partial withdrawals, if any. In addition, this certificate must also show the actual gross yield and net yield taking into account the actual charges deducted. This certificate must confirm adherence of above prescription.”


The benefit illustration provided in the policy document is a tool for the investors to understand the product, its benefits and shortcomings clearly. The onus lies with the investor finally to comprehend the product well in order to make an informed decision. Investors need to identify their financial goals so that they can have the right products in their portfolio.

Considering this development, the charges on mutual funds and ULIPs will be at a level playing field.  ULIPs are long-term products with reasonable insurance cover and availability of expected benefits towards the end of the policy term. The insurance regulator in the circular has stated that majority of the products are designed for a tenure for 10 years and above. Mutual funds provide a gamut of schemes for investors with appetite for asset classes like equity, fixed income, gold, sector-specific investments and exposure to different markets. Despite the inherent differences, ULIPs and mutual funds were pitted against each other. Both the products have a defined investment objective and investment horizon. Such regulations will benefit investor, supplement the reach of financial products and help the growth of the financial services industry.


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