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dergo dramatic changes both in its products and in the way they are sold, following the introduction of new regulations on unit-linked insurance plans (Ulips).

The new regulations ensure that all segments of policyholders get a fair deal. By getting insurance companies to spread charges across the first five years, the insurance regulator has also reduced chances of mis-selling by agents who position regular premium plans as ones with single premium plans or short-term plans.

Here we try to deconstruct the new regulation in terms of what it means for existing and prospective customer of Ulips.

Are Ulips worth buying now?

The new guidelines, which come into force from September 2010 will bring down charges imposed by insurers on Ulip plans at various points of time. This means that almost every Ulip plan being sold at present will have to be reworked by life insurance companies and a fresh approval sought from the regulator.

The cap on charges would translate into better returns for policyholders, including those who chose to exit early for any reason. Given the additional flexibility that new regulations provide for early withdrawals (after five years), it makes sense not to buy Ulips now but wait until September when the new guidelines take effect.

Are Ulips worth buying after September?

"Everybody knows about the power of compounding, but few allow their investment enough time to compound returns. Ulips are the only product that forces systematic savings," says Sanjiv Bajaj, joint MD of Bajaj Capital. The new charge structure brings Ulips more close to mutual funds then ever.

According to Mr Bajaj, the guidelines on a minimum level of insurance cover for all Ulips is a positive. "People save with a goal in mind. If the saver dies, his savings stop but the financial goal remains whether it is a child's education or marriage. Even if one is saving only for retirement, protection is necessary to ensure that one's spouse gets the retirement funds," he says.

What should existing Ulip investors do?

It is always disappointing to know that a new mobile phone has been launched with many more features at the same price that you bought yours a month ago. But take heart. If you have bought an existing policy with the intention of continuing to pay premium until maturity, you may not need any of the new features.

The new features are aimed at providing a fair deal to those who exit early. If you already hold a Ulip, make the best of your existing plan by paying your premium diligently through the life of the policy. The insurance company has already collected their charges and you can average a better return by staying for the term of the policy.

Will agents continue to promote Ulips?

One tricky issue that companies have to address is - how do we continue to reward agents for selling long-term policies and at the same time give policyholders the flexibility to exit without deducting significant charges. There is a possibility that fewer agents will push Ulips. There is also a likelihood that insurance companies may introduce a condition where the law backs commissions from agents for policies that are surrendered early. If that happens, the chances of agents mis-selling will come down considerably.

Do Ulips make sense if you are above 45?

For those who are above 45, the minimum level of insurance that has to be compulsorily purchased is half of what is prescribed for those up to 45. This means that out of every Rs 100 invested, a lesser amount would go towards insurance and more towards investment.

Do pension plans make sense?

If you have a very low risk appetite and are the type who would rather keep his money in bank deposits. The pension plan with minimum guaranteed returns of 4.5% is the right plan for you. The flip side of the pension plan is that to ensure a guaranteed return, insurance companies will invest most of the funds in government bonds where the best of returns would be around 8%.

If you have a higher risk appetite and wish to see a significant part of your retirement funds to be invested in equity, you can always opt for the New Pension Scheme regulated by the Pension Fund Regulatory And Development Authority (PFRDA).

Source: ET Bureau