By Tensing Rodrigues
I have read recently that IRDA has prescribed that all ULIP pensions and annuity products should carry a minimum sum assured payable on death. Will that not make sure that ULIP Pensions are not sold in place of MFs? — Anthony Lacerda
Like many others, you seem to be getting it wrong; pension plans cannot be compared to MFs; nor should they be compared to insurance policies.
In para 1.2 of ‘Guidelines for Unit Linked Life Insurance Products’ issued on December 21, 2005, IRDA very clearly mandates that all “Non-Single Premium” ULIPs shall carry “minimum sum assured” (minimum amount payable on death of the life assured) of at least five times the annual premium or half times the annual premium multiplied by the term of the policy, whichever is higher. The purpose of this requirement was precisely to prevent the ULIPs from being turned into MFs under the garb of insurance policies. But, to make justice to the different nature of pension plans, IRDA added a proviso at the end of para 1.2: “In respect of products under pension and annuity business Table 1.2 is not mandatory.”
Later IRDA amended these guideline by a circular dated March 12, 2008, dropping “half times the annual premium multiplied by the term of the policy” and retaining only “five times the annual premium” as the formula for minimum sum assured for Non-Single Premium ULIPs. But it took care to retain the proviso to para 1.2 of the Guidelines, thereby continuing to keep pension and annuity products outside the purview of para 1.2.
The latest circular IRDA/ACTL/CIR/ULIP/071 /05/2010 dated May 3, 2010, however, deletes the proviso and brings the pension and annuity products under the purview of
para 1.2.
This goes against the very purpose of pension. Insurance protects us against the financial distress that may be caused to the dependents of a person by his or her death. The purpose of the “sum assured” of a life insurance policy is to make a sum of money available to the dependents so as to overcome the financial distress. Sum assured payable on the death of the life assured is therefore the defining element of a life insurance policy.
A pension policy too is about risk; but not about the risk of death. A pension policy seeks to offer protection against the risk of not dying, that is, living too long. Living beyond the age when you can work and sustain yourself is a risk that all of us carry – living beyond this age can cause financial distress to a person. The purpose of the pension is to make available a regular flow of money so as to overcome this financial distress.
When a person buys a pension he is paying to transfer the risk of living too long to an insurance company. By thrusting on him a sum assured payable on death, and making him pay for it, IRDA is defeating this very purpose of buying a pension. Could anything be more absurd?
IRDA seems to have got its fundas wrong. Pension does not need to be loaded with “minimum sum assured” to become a “risk product”; it is a risk product by itself, far outside the domain of SEBI.
