The Insurance Regulatory and Development Authority of India (IRDAI) has recently approved the launch of Index Linked Insurance Products (ILIPs), marking a significant milestone in the Indian insurance sector. They are launched as a separate category under the linked insurance products.

ILIPs will be unique because their benefits will be directly linked to a publicly available index. Apart from this key feature, the IRDAI, in its recent notification has said that all the prominent provisions of Unit Linked Insurance Products (ULIPs) will apply to index linked insurance products as well. 

This has been decided to ensure a high degree of transparency, simplicity, and fairness for policyholders. Most probably, like other life insurance products, these will also have tax benefits under section 80C.

A simple example of ILIP

Suppose a policyholder invests in an index linked insurance product that is linked to NIFTY50 index. The Net Asset Value (NAV) of the ILIP will fluctuate based on the performance of this index. 

If the NIFTY50 index performs well, the NAV of the ILIP increases, leading to higher value for the policyholder. Conversely, if the NIFTY50 index performs poorly, the NAV & fund value of the ILIP decreases.

However, like ULIPs, this ILIP policyholder also will face a range of charges including premium allocation charge, fund management charge, guarantee charge, policy administration charge, surrender or discontinuance charge, mortality or morbidity charge, rider charge, switching charge, partial withdrawal charge, and miscellaneous charge.

ILIP Charges

Cappings on the charges for index linked insurance products will be as follows (excluding surrender charges):

Premium allocation charge: 12.5% of annualized premium in any year

Fund management charges (excluding discontinued policy fund):  135 basis points per annum. 

Guarantee charges: 50 basis points per annum

Policy administration charges: Rs 500 per month

Switching charges: Rs 500 per month

Partial withdrawal charge: Rs 500 per transaction

Miscellaneous charges: Rs 500 per alteration

Surrender Charges

Caps on surrender charges in index linked insurance products will be: 

For annual premiums policies –

AP = Annualized premium. FV = Fund Value

For single premium policies –

SP = Single Premium FV = Fund Value

Is switching possible?

Although more details are awaited, if we check similar policies in other geographies, insurers can allow switches between different indices.

This facility allows policyholders to align their insurance investments with their financial objectives, risk tolerance level and market outlook. 

However, the specific terms and conditions for switching may vary between different insurance providers and policies. 

What happens on maturity?

The maturity benefit of an ILIP is expected to be at least equal to the balance in the unit fund value available on the date of maturity. 

Basically the policy shall offer one of the following in the event of death or maturity: 

a. the sum assured as agreed in the policy plus the balance in the unit fund; 

b. the sum assured as agreed in the policy or the balance in the unit fund whichever is higher.

This will ensure that policyholders receive a fair return on their investment at the end of the policy term.

Final words

It is a new entrant in the life insurance space and it will surely make waves in tier II & tier III cities. For the savvy investors who can manage ETF/ index investments, there is little to get excited about. However, from the insurance penetration perspective, this insurance product can hold substantial appeal. 

So, let us wait for these kinds of products to be launched and then see what’s actually there on offer!

Note: The article is for informational and educational purposes only. Not advice. Please consult a SEBI-registered investment advisor before making any investment decision.