Life insurance products offered after 30th September may have higher premium because of the new rules of the Insurance Regulatory and Development Authority (IRDA) on product design.
The draft guidelines—issued by the insurance regulator—were introduced in May. According to the new guidelines, life cover in a policy must be either 10 times the annualised premium or 105% of the total premium paid till the date of death.
When the sum assured of a policy increases, automatically the mortality charges will increase as a result premium of a traditional plan will rise. Also, in case of traditional products such as endowment plans, the savings component is set to decline as more money will be allocated towards taking care of the insurance needs and less towards savings. This, in turn, would provide less return from such covers.
When you buy a life insurance, there are some charges levied. Mortality charge is among one of them. Mortality charges are taken from the premium paid by the insured person. They are that part of life insurance premium that go towards providing a death benefit cover.
Deepak Yohannan, CEO, MyInsuranceClub, said, “The increase in life cover will result in an increase in premium for all kinds of life insurance plans—traditional and ULIPs (unit-linked insurance plans).”MyInsuranceClub.com is an online insurance comparison portal of iGear Financial Services.
Mr Yohannan added, “This is a clear step by IRDA to align life insurance products more towards the ‘insurance’ component rather than the ‘investment’ component. In the larger scheme of things, this is the right way to go. Recommendations were to make the life cover in a policy 20 times the annual premium but that would be quite a drastic increase from the current five times and hence was probably held back.”
Swapan Khanna, co-founder, i-save.com, “These draft guidelines are likely to impact savings oriented traditional products and ULIPs. Pure protection plans or term insurance plans—that provide only risk cover—will not be impacted since these offer covers at multiples of 300-500 times of premium and even higher.” I-save.com is an independent provider of information and research on insurance and personal finance.
Mr Yohannan pointed out, “The biggest impact would be on single premium products which were almost a hit with those who just wanted to invest for tax benefits and were not really looking at the insurance advantage. Single premium plans are easier to sell as the customer doesn’t need to commit recurring payments for large periods of time.”
Mr Khanna added, “In case of savings oriented traditional plans or ULIPs, a higher sum assured would mean higher mortality charges and thus a low savings or investment component. Having said that, a trend has already started—seen by recent products launched—of having sum assured of 10 times and higher. This might have been due to the direction set by the proposals under Direct Taxes Code (life cover should be 20 times the annual premium for tax benefits). And the Budget for 2012-13 has proposed a minimum cover of 10 times the annual premium for tax benefits.”