New Insurance Regulations and You

The Insurance Regulatory and Development Authority (IRDA) has enforced new regulations on life and general insurance companies to make policies more customer-friendly. As a result, all insurance companies have refiled their products in accordance with the new regulations. These changes have been in effect since January 2014, with over 500 new policies that are in tandem with the new regulations being released by insurance companies since then. Here’s what the changes mean to you:

Term Insurance

In general, there are no changes as far as term insurance is concerned, except for in the plans being offered by LIC. LIC, which had been using the old mortality table, has been asked to shift to the new mortality table. The advantage of this is that with an increase in the average life expectancy due to the advancement of medical sciences, insurance rates have decreased in the new mortality table. As a result, new term plans from LIC are being offered at lesser rates.

Endowment Plans

Here are the changes that have been introduced to endowment plans:

• Higher Coverage: New endowment policies come with higher coverage as the product is positioned as a life cover. Due to this, its investment portion has reduced. For regular premium paying policies, the insurer will be covered for a minimum of 10 times if he falls under the age of 45, and 7 times if he is more than 45 years of age.
• Higher Surrender Value: There will be the advantage of a higher surrender value. The surrender value varies from a minimum of 30% to the maximum of 90% depending on the surrender year. The option of surrendering the policy in the second year itself was not available earlier. This option has now been made available to policyholders. In the earlier policies, the surrender value was calculated without taking the first year premium into consideration. This is being changed as per the new regulations, where the minimum surrender value is 30% of all the premium paid. Due to this, insurance companies are not able to take long-term investment calls as they need to keep some investments in the short-term to take care of surrender pressure. This will affect the policy’s returns. The objective of taking up an endowment plan is to make disciplined investments towards an objective and hence, it is not advisable to surrender the policy unless and until an emergency situation arises, rendering you incapable of paying your premium.
• Returns Illustration Reduced: The IRDA has asked insurance companies to use the new illustrated return of 4% and 8%. In earlier policies, insurance companies had shown the illustrated return of 6% and 10%. The returns from new policies have therefore been made realistic.
• Service Tax: All insurance companies in India, excluding LIC, had a practice of collecting service tax from policy holders and paying it on their behalf to the Service Tax Department. Prior to the regulations, LIC would pay the service tax for customers and deduct the same from the bonus generated by the policy. The new regulations have enforced LIC to charge the same from the policy holder.
• Agents’ Commission: Commissions paid to insurance agents/brokers will now be dependent on the payment of the premium term. Lower commissions paid to the agent are definitely going to benefit customers. For example, if the policy’s premium paying term is 5 years, the agent’s commission should not go beyond 15%. The maximum commission is being fixed at 30%, irrespective of the duration of the term. This is being done to avoid product mis-selling.

To summarize, the new regulations for endowment plans are more customer-centric, and allow the flexibility of choosing products, long-term or short-term, thereby increasing the surrender value and protecting his capital for good real-time returns. However, it is always advisable to choose an insurance product in line with your objectives and look at it with a long-term investment view, as the returns from short term polices are very low.