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Those who bought Ulips and let them lapse will now get more time to revive their policies and earn better returns for the discontinued period. New rules allow insurers to review policies which would otherwise have been cancelled but require them to pay more to the insured.

Informing life insurers of the new norms, IRDA said that policyholder will have the right to revive discontinued policies within two years from the date of discontinuance and not later than the expiry of lock-in period. The new norms on discontinued policies are effective next month. Insurers are also required to ensure that they provide a minimum return equivalent to the savings deposit of State Bank of India which is currently 4%. This is the return that the policy has to receive after the insurance company deducts its fund management charge.

In addition to fixing a floor on the returns that a discontinued fund would earn, RBI has capped the fund management charges on discontinued policies at 0.5% which increases the upside for the policyholder should the markets do well.

"Any policy revival is always beneficial to a policyholder," said M N Rao, MD, SBI Life Insurance. "Until now it was a one-way street for discontinued policies. But the new rules will give them a fresh lease of life," he said. According to Rao, the rules also benefits insurance companies as they will get to earn from fund management charges on the policies.

Insurers say that the downturn in the markets has resulted in some policyholders discontinuing their installments after watching their savings shrink in the form of lower NAV. But since most of the charges in life insurance are front-ended, they lose out on long-term benefits. "Insurance policies will generate good returns only if the policyholder continues for the full-term. Discontinuing a policy is never beneficial for a policyholder since they have already paid for bulk of the charges in the first year," said a CEO of a private life insurer.

IRDA's move comes at a time when the life insurance industry is struggling with sales of new policies in the wake of new guidelines in September 2010 that capped distribution costs. Although numbers on discontinued policies are not available, insurers say that it would run into thousands of crores considering that over 20% of policies lapse for life companies. IRDA's move comes at a time when the life insurance industry is struggling with sales of new policies in the wake of new guidelines in September 2010 that capped distribution costs.

"Many representations have been made by insurers to allow a higher revival period to enable the policyholder to revive at a later stage and requests were also made to allow the insurer to levy fund management charge for managing the discontinued linked fund," the IRDA said in a circular.