Ulip holders may get option to stagger maturity payments to cushion current stock market impact

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IRDAI has allowed insurers to offer Ulip holders whose policies are maturing till May 31, to switch from lump sum payout option to staggered payout option. This move is aimed at helping unit linked insurance policy (Ulip) holders hit by the stock market crash. However, both the possible advantages and risks attached with switching to a staggered payout option also need to be evaluated before a Ulip holder chooses to do so.

This move is relevant for those Ulip holders whose policies are maturing till May 31 and had chosen a lump sum payout option for maturity settlement. These investors may be hit hard by the recent stock market crash as the payout is normally based on the NAV of the units on the maturity date of the Ulip. Switching to a staggered pay out option would mean that the investor would get the maturity amount in instalments with each instalment being based on the NAV of the units remaining in the Ulip on the day of payout.

If the stock market recovers to higher levels later than at present, then the NAV of the units may be higher than what it is today. Consequently, the investors return from their investment in the Ulip could improve. However, this is also risky as it is dependent on how the stock market moves during the staggered payment period therefore Insurance Regulatory and Development Authority of India (IRDAI) has asked the insurers to take clear consent of the policy holder in case they wish to go for the staggered payment option. Additionally, the Ulip holder will also have to evaluate as to whether deferring the maturity payment over several years in the future is suitable for his/her financial requirements or not.

According to the IRDAI circular, issued on April 4, 2020, “Where unit linked policies mature and fund value is to be paid in lumpsum, Life Insurers may offer settlement options in accordance with Regulation 25 of IRDA (Linked Insurance Products) Regulations, 2013. This onetime option is regardless of whether such option exists or not in the specific product. The Life Insurers however have to exercise all due care and diligence to explain clearly the possible downside risk of continued fluctuation of fund value based on daily NAV and clear consent has to be obtained from the policyholder. This is allowed for unit linked policies maturing up to 31st May 2020.”

Vivek Jain, Head-Investments (Life Insurance), PolicyBazaar.com said that according to the regulation 25 of IRDA (linked insurance products) Regulation, 2013, generally, when the ULIP policy gets mature a lump sum is paid to the policyholder. However, the 2013 regulation had also allowed life insurers to pay the maturity value over a period of 5-years in installments. “But, the discretion whether insurers’ want to give this option (in their policy documents) to the policyholder was left to them. Apart from this, the periodicity made available to the policyholder depends on the insurer. It can either be in monthly, quarterly, half-yearly or yearly mode. The option once exercised cannot be changed later,” he added.

IRDAI has permitted life insurers to offer settlement option on maturity payouts for all ULIPs maturing before 31 May 2020, irrespective of the original policy having this feature or not. This is because ULIP fund values would have seen depletion in the current volatile market conditions.

Anil PM, Head – Legal & Compliance, Bajaj Allianz Life said, “To protect the interests of policyholders whose polices are maturing before 31 May 2020, the regulator has provided them the option to receive their maturity benefits as staggered payments over the next five years. Thus if policyholders want to continue and wait for the markets to improve from present levels, they can opt for partial settlement option on their ULIP payouts”

Here is the list of important FAQ (
issued by IRDAI on April 7) on settlement options under Unit Linked life insurance plans(ULIPs):

1. What is a instalment/staggered settlement option under ULIP?

It is an option to be exercised by the policyholder of a unit linked life insurance policy to receive the maturity proceeds in instalments. However, you must know that the first instalment will be paid on the date of maturity.

2. Whether nominee can exercise this option in case of death benefit?

No. this option is available only to the policyholder on maturity of the policy.

3. How does this settlement option work?

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 staggered/instalment settlement option provides an opportunity to the policyholder to encash the units at the Net Asset Value on the date of each instalment over a period not exceeding five years, instead of limiting to the value on one particular date.

You must also now that except pension and variable insurance products, settlement option is available for all the other linked products

4. Who will bear the risk of investment during the settlement period?

The policyholder continues to bear the risk during the settlement period as the balance will continue to stay invested in the segregated fund and its value is subject to market risks. It may go up or down basis the market performance of your fund portfolio.

5. Where will the funds be invested during the settlement option period?

The funds will remain invested in the same segregated fund which was opted by the policyholder at the time of taking the policy or the segregated fund as on the date of maturity in case of fund switches exercised during the policy term.

6. For how long I can have the settlement option?

The period of settlement option can be for a maximum of 5 years from the date of maturity. Also, 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.

7. How will the instalment quantum be decided?

The available number of units under the policy shall be divided by the residual number of instalments to arrive at a number of units for each instalment which will then be multiplied by the net asset value on the date of payment.

For example, if the policyholder opts for settlement in five (5) annual instalments, the first instalment will be one-fifth (i.e., 1/5) of the number of units available to the credit of the policy on the date of maturity, multiplied by the NAV as on that date. The second instalment will be one-fourth (1/4) of balance number of units multiplied by the NAV as on that date and so on.

. Whether Life Insurance cover will continue during settlement option?

No. 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.

Hence, if the policyholder dies after exercising the option, but before the maturity date then in such a situation, the death benefit proceeds as per the terms and conditions of the policy shall become payable and settlement option will not be applicable.


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