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Insurers told not to levy exit fee after five yrs.

THE Insurance Regulatory and Development Authority ( IRDA) on Thursday directed all life insurance companies not to levy any charge on customers if they surrender their policies from the fifth year onwards.

" No surrender charge can be levied by an insurer for policies surrendered from the fifth policy year and thereafter the policyholder will be entitled to receive the full fund value on such surrender," IRDA said in a circular sent to CEOs of all life insurance companies.

IRDA has also given a concession to insurance companies by excluding the charges levied by them on their customers for incidents like death and disability from the overall limit on charges on their unit- linked insurance policy ( ULIP) schemes. ULIPs are life insurance products that are invested in the stock market.

" Mortality and morbidity charges may be excluded in the calculation of the net yield," according to the IRDA circular.

Mortality is the probability of death, while morbidity is the probability of disability. The insurance companies levy mortality and morbidity charges on customers which increase with the age of the policyholders.

" IRDA's latest circular on capping of charges for ULIPs will positively impact customer benefits. The exclusion of mortality and morbidity charges from the cap will ensure that

there is no compromise on growth in sales of valuable life cover," Max New York Life Insurance senior director Debashis Sarkar said.

" In addition, the life insurers will not have to resort to crosssubsidisation across age groups to meet the charge cap," he added. Overall, no surrender charge from fifth policy year is in the positive direction for policyholders who may need their accumulated funds due to unforeseen circumstances.

However, surrender charges and their quantum and gradients need to be prudently shaped in the first four years so that it is fair to all policyholders.

Last month, IRDA put a cap on overall charges that life insurance companies can levy on subscribers of their ULIPS. For products which have a maturity of 10 years, insurance

companies have to maintain the difference between gross yields and net yields at 300 basis points. Gross yield includes various charges levied by insurers and added to net yield.

The difference between gross yield and net yield cannot exceed more than 300 basis points, IRDA had said.

IRDA further said that fund management charges should not exceed 135 basis points irrespective of the tenor of the contract.

The life insurance industry had wanted IRDA to exclude mortality and morbidity charges out of the cap.

IRDA said that certain concerns were expressed by the industry on the circular issued last month and meeting of life insurers with IRDA took place on July 29 to discuss all these issues after which the new changes have been brought in.

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Publication:Mail Today (New Delhi, India)
Date:Aug 21, 2009
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