Life insurers are busy revising their products to comply with the new norms effective from Oct
Life insurance companies have begun launching traditional insurance policies that are compliant with the revised regulations introduced by the Insurance Regulatory and Development Authority (Irda) in February. Insurers are busy revising their existing products to conform to the new norms that would be effective from October 1.
Financial Chronicle does an overview of the salient features of the regulations and a few gaps that investors may still face in the new products:
First, the new products may not be tax-compliant for people above 45 years of age. According to the new regulations, for people 45 years and above, in a regular premium policy, the death cover should be higher of seven times the annual premium, or 105 per cent of all premiums paid. However, according to the income-tax laws, an insurance product should have a minimum cover that is 10 times the annual premium to qualify for benefits under Section 80 C and 10 (10) D. Section 80 C allow premium paid towards a life insurance policy to qualify for a tax deduction up to Rs 1,00,000, while Section 10 (10D) would allow that the maturity proceeds to be tax-free.
Gopesh Modi, head of product, Edelweiss Tokio Life Insurance, said, “Insurers would try to offer products that have a sum assured that is 10 times the annual premium to ensure that they qualify for tax benefits. Where ever a product does not qualify for tax benefits, it will be communicated to the customer.”
The second change could come in the form of higher premiums but with higher life cover. With the new norms requiring products to have higher sum assured, the cost of mortality cover would increase. Therefore, a higher portion of your premium paid would go towards mortality charges thereby lowering the contribution towards investments.
The new norms state that in case of a regular premium policy, the sum assured should be 10 times the annualised premium, or 105 per cent of all premiums paid for people below 45 years of age. For a single premium policy, the cover should be highest of 110 per cent of the single premium or minimum guaranteed sum assured on maturity. The existing savings products did not have such high sum assured.
There is going to be disappointment among policyholders in this aspect: commission to distributors will continue to remain high. The new norms have linked a distributor’s commission to the premium payment term. In case of regular premium insurance policies, a policy with a premium paying term of five years will not pay more than 15 per cent in the first year, 7.5 per cent in the second and third year and 5 per cent subsequently. As the premium paying term increases to 12 years and above, the commissions payable in the first year increases up to 35 per cent in case the company is at least 10 years old and 40 per cent in case the company is less than 10 years old. In case of direct sale of products, such as the online mode, there will be no commissions and this benefit will be passed on to the policyholder.
Pankaaj Maalde, head financial planning of Apnapaisa.com, said, “The average term of a traditional insurance policy is 15 years or more. The new regulations allow companies to pay 35 per cent of the first-year premium paid by the policyholder as commission to agents if the policy term is 12 years or more. So, the loss to the customer continues.”
“Traditional insurance products offer less than 6 per cent returns in most cases due to high commission paid to the agents and higher administrative cost,” added Maalde.
But there is some good news. Policyholders will get higher minimum guaranteed surrender value (GSV) in traditional plans. For traditional plans, with a premium paying term of 10 years or more, there will be a GSV after three years. For premium paying terms of less than 10 years, the GSV will accrue after the second year. This GSV will be 30 per cent of total premiums paid. At present, the GSV is 30 per cent of all the premiums paid minus the first-year premium, and is paid only if premiums have been paid for three years.
Says Rajeev Kumar, chief actuary, Bharti Axa Life Insurance, “In the new products, the GSV increases progressively with the tenure of the policy. It would be 30 per cent of the premium paid in second policy year, 50 per cent of the premium paid till year seven, and progressively increase after that.”
Enhanced transparency always helps. According to the new norms, insurers will provide a benefit illustration at assumed rates of return of 4 per cent and 8 per cent. In the earlier plans, the benefit illustration was shown on 6 per cent and 10 per cent return.
