The reputation of unit-linked insurance plans (Ulips) has been sullied by their high charges, appallingly high commissions to agents and mis-selling by them. Although Ulips account for almost 90 percent of insurance companies' business, these policies have often been criticised for giving short shrift to the main purpose of life insurance - providing adequate life cover. Moreover, high charges also eat into the returns generated by these policies.

Last Wednesday the Insurance Regulatory and Development Authority (IRDA) moved to address some of these concerns. It imposed a ceiling on the maximum amount that Ulips can charge to meet various expenses. The move is certainly in the interest of customers. Let's see how.

New norms Unit-linked insurance plans offer a solution to people who want the convenience of insurance and investment bundled in one product. The convenience, however, came at a cost with insurers being allowed to levy high charges. But not any more.

According to the new norms, in case of short-term Ulips with a policy term of 10 years or less, the spread between the gross yield and the net yield cannot exceed 3 percent or 300 basis points. For long-term Ulips with a policy term of more than 10 years, this spread cannot exceed 2.25 percent or 225 basis points.

Yield is a measure of return offered by an investment compared with its price. Higher the yield, greater the return one makes on an investment. The net yield is the gross yield less all charges.

The move is likely to make Ulips more competitive compared with mutual fund products. These guidelines will come into effect from October 1. All the products launched on or after this date will have to adhere to these guidelines.

How about existing policy holders? Are they at a loss? No. The regulator has directed all life insurers to re-examine their existing portfolios and directed them to either modify the policies as per the fresh guidelines or withdraw them by December 31.

Impact on customers Higher returns. The regulator's ruling is certainly good news for prospective buyers and will give better returns in the long run. Take an example. One of the best-selling policies of a private life insurer gives a net yield of 6.5 percent for a 20-year-old policy. If you pay an annual premium of Rs 60,000, the maturity amount is likely to be Rs 24,52,104. However, as per the new ruling the minimum net yield should be 7.75 percent. Going by this, the maturity value should be a little over Rs 28 lakh - amounting to an extra return of around Rs 3.5 lakh.

Less protection. This is a great move for consumers who are looking for high investment returns from Ulips. However, in this game of returns the main purpose of insurance - adequate life cover - could take a back seat. “The new circular should ensure that customers get value for money. However, since mortality charges are included in total capped charges, we will probably see products that offer high amounts of insurance cover (above 10 times the premium) being phased out. If a 20-year policy were to offer a life cover of 100 times the annual premium, it would give a negative return at maturity,” says Andrew Cartwright, chief actuary, Kotak Life Insurance.

Agrees Rajesh Sud, chief executive officer and managing director, Max New York Life: “The move will bring the insurance business closer to investments, thereby lowering the emphasis on the key benefit of protection. Mortality charges are also included within this cap. This may result in sale of less life insurance cover, which may not be beneficial both for the customer and for life insurance companies in the long run.”

Easier comparison. The capping of charges will now make it easy for you to compare Ulips. “The cap on charges will make comparison easy for a customer. He will be able to gauge various products and see what is best for him in terms of return generation over the long run,” says Debashis Sarkar, senior director and chief marketing officer, Max New York Life Insurance.