A large number of people have suddenly stated receiving unsolicited calls, SMS and pamphlets with their morning newspapers about ‘good’ insurance policies being unavailable after 01 Oct 2013 and they should take such policies before it is too late. What has happened which has generated such a huge concern amongst the insurance agents about your well-being?
Actually, new guidelines issued on 16 Feb 2013 by Insurance Regulatory & Development Authority (IRDA) come into effect from 01 Oct. The notifications pertain to the structure of non-market-linked insurance products like traditional policies, market-linked insurance policies like ULIPs, variable insurance plans and health insurance policies. Here are some basic features of the linked, non-linked and health insurance products which are likely to hit the market from October.
Minimum sum assured (or the Life Insurance Cover): At present, the insurance companies provide 7-8 times of annual premium as the life cover depending on age of customers or the plan. Post 01 Oct, following changes will take place:-
- Non-market-linked products (ie, traditional insurance policies): For individuals below 45 years of age, minimum sum assured will be minimum 10 times or 105% of all premiums paid. For age group of 45 years and above, it would be 7 times of the annual premium or 105% of the total premium paid as on date of death.
- For market-linked products like ULIPs: For those below 45 years, it will be 10 times of annual premium or as per a formula prescribed by IRDA. For individual of 45 years and above, it would be 7 times of annual premium or as per the IRDA formula.
- For health insurance products: The health insurance cover would be 5 times of annual premium or Rs 1 lakh per annum, whichever is higher for both age groups.
Surrender value: Surrender value is the money which a policyholder receives after he/she decides to terminate the policy before its maturity. At present, insurance companies offer a surrender value of only 30% on all premiums paid minus the first year premium and the policyholders can claim surrender value only if they have paid premiums for at least three years. The new guideline has proposed to hike the surrender value for traditional plans. The insurers have to offer a guaranteed surrender value (GSV) after three years with a premium paying term of 10 years or more. For policies which are for less than 10 years, the GSV would accrue after the second year. This GSV will be 30% of total premium paid if the policy is surrendered between the 2nd and 3rd year. However, it will become 50% between the 4th and the 7th year.
Commission Structure: This is the main reason for those pesky calls and SMS. Since IRDA has linked commissions with the period of premium payment, the commissions of agents and brokers on sales of insurance products will be reduced significantly. In single premium non-pension products, the agents will only receive commission up to 2% of the premium paid. In regular premium paying schemes like endowment policies of five years, the agents will get up to 15% of the first year premium followed by 7.5% in second year and 5% thereafter.
For those insurance products where premium payment tenure is longer like whole life insurance policies, the agents will get commissions up to 35% (if the company is at least 10 years old) and 40% (company with less than 10 years of track record) of the first year premium, 7.5 % in second year and 5% till the premium paid by the policyholders.
No commissions will be paid in direct sale of products like term insurance and the accrued benefits will be passed on to the policyholders.
More transparent: The new product guidelines ensure greater transparency as the insurance regulator has asked all insurers to clearly indicate whether the product is protection-oriented, savings-focused or a combination of both. In ULIP products, the life insurers will have to provide performance sheet to policyholders on monthly basis. Besides, the insurers have to disclose the charges, deducted taxes, payment details and other necessary information to their customers by issuing an annual certificate.
- Insurance policies should be taken for investment only if you do not want separate products for insurance and investment, and are ready to compromise in both, insurance cover as also the investment returns.
- If you still decide to go ahead with an insurance policy for the purpose of investment, wait for the new regime after 01 Oct since that will be more transparent, less rigid and more beneficial to you.
Col (retd) Sanjeev Govila, CERTIFIED FINANCIAL PLANNERCM, CEO,
Hum Fauji InitiativesTM, Your Long-term Partner for Wealth Creation
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