Insurers to change Ulip structure

Insurers are set to tweak their unit linked insurance product offerings once the Direct Tax Code kicks in. Ulip structures are likely to undergo a change and a higher life cover may be offered to qualify for tax benefits

Insurers are set to tweak their unit linked insurance product Ulips offerings once the Direct Tax Code DTC kicks in. Ulip structures are likely to undergo a change and a higher life cover may be offered to qualify for tax benefits.

Clause 70 of the DTC,2010 specifies that only insurance policies where the annual premium paid does not exceed five percent of the capital sum assured will qualify for deduction. This implies that the minimum life cover should be 20 times the premium paid. Under the current regulatory guidelines,insurance companies are required to offer a minimum cover of 10 times the premium paid in a year.

If DTC comes with the guideline then whether the regulator says or not we will do it, said a senior official with a leading insurance company. Clearly insurance companies will move towards building product structures that qualify. Another industry insider said that most insurance companies are ready to do this as majority of the insurance products are sold in the name of tax savings.

This move will change the look of Ulips into more of an insurance product, said Surya Bhatia,a Delhi-based financial planner. While the returns on investment will go down,the insurance cover will increase.

Almost all Ulips offer 10 times life cover on the premium paid as specified by the insurance regulator Irda that had increased it from five. Insurance firms,however,seem keen on changing the product structure to qualify for the tax benefits as specified under the DTC.

The move will make Ulips less savings oriented and more protection oriented, added the official. On being asked why a higher life cover isnt being given if it could be offered,the official said,There is buying and selling behaviour and if I can postpone,I will postpone.

Even as the primary role of an insurance plan is to provide protection,Ulips have always been more oriented towards investment and have been sold as investment products. In 2010,Sebi took up this issue,which led to a clash with the Irda.

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While the issue was then resolved by the government,the insurance regulator later brought in several changes to the Ulip structure.