Insurance companies have started re-filing traditional products—such as endowment & term plans—to ensure that there is no shortage in the market after October 1, when all products have to be compliant with the new IRDA norms.
Insurers are re-filing traditional products keeping as reference the draft guidelines—issued by the Insurance Regulatory and Development Authority (IRDA) in May—even as they are waiting for clarity on re-filing of ULIPs (unit-linked insurance products).
According to IRDA, final guidelines on product designs will be declared soon. However, the regulator has asked insurers to start filing products as it will be too late if they wait for the final guidelines. Some insurers have started re-filing traditional plans. IRDA had asked all life insurers to finish re-filing of traditional products by September 30.
By October, all products that do not comply with the new guidelines will have to be withdrawn from the market. But existing policy holders will continue getting the benefits specified at the time of sale. With the new regulation taking effect soon, insurance market will be flooded with newly designed traditional products.
According to the draft guidelines, insurers would have to offer these products with a minimum death cover of 10 times the annual premium paid. This is also in line with tax benefits the policy holder enjoys from insurance products. While this will increase the premium as the life cover goes up, the policyholder will also get a guaranteed surrender value, provided the premium is paid for two years.
Akshay Mehrotra, chief marketing officer, Policybazaar.com, said, “The new guidelines are aimed to be better for consumers but the structuring of products linked to 10 times life cover may make traditional life insurance product costly in terms of term cover charges. Currently traditional products are considered secure investment options but making them heavy on charges does not seem like a great idea. This will result in making traditional plans less lucrative for the consumers, which should not be the case as all insurers do not want consumers investing less in such products.”
Pankaaj Maalde, head-financial planning, ApnaPaisa.com, “All traditional plans with term of 13 years or less do not fit in the new norms as the sum assured in this plan is less than 10 times of annual premium. Mostly, all traditional plans require revision in the line of new norms according to the changes made in the income-tax (I-T) laws from 1 April 2012. To qualify for deduction under Section 80C of the I-T Act—amended in the last budget—any premium paid for an insurance policy issued after 1 April 2012 shall not exceed 10% of the actual sum assured. The maturity value is tax free only if it satisfies the above criteria throughout the policy term.”
“We regularly get queries from customer that they are not able to pay up premiums after two years and would want a way out, but the surrender value becomes a big deterrent here for them move out of the policy, thus they end up losing a lot. The guaranteed surrender value will clause will be very much beneficial as consumers, as they will not lose savings in case of failure to pay,” Mr Mehrotra added.
Niraj Jain, CEO & principal officer, www.insurancemall.in, said, “Re-designing products should not be a problem but managing the profitability and cost of acquisition for the same would be an upward hill task for insurers. They will finally start selling insurance products and not mutual funds in the disguise of money back and risk cover. This will also bring down the administration cost on the funds and an average Indian insurer will be able to buy a genuine and pure risk cover at very good rates. We are already seeing the term insurance market changing in terms of visibility and price points.”
Mr Maalde further said, “IRDA has asked to implement the same from 1 October 2012, but till that time old plans will already be sold in the market. All the plans which do not fall under the new norms will not be eligible for tax deduction and maturity proceeds will be taxable. Investors must take the note of the same.”
Mr Jain added, “Even today the risk premium is very miniscule compared to the administration cost/fund management cost. Insurers will have to accommodate the higher risk premium technically in the same range. Those who don’t will lose the first mover advantage of offering high sum assured at almost same pricing. Eventually, the new age customer has started asking pertinent questions like: what’s the risk premium, administration and fund management cost? It is a welcome change for the insurance industry and will certainly benefit the end consumer.”
“We will see major changes in the insurance products after October 2012. I think ULIPs and single premium plans also need to be changed in line with the new provisions of I-T. IRDA should also reduce commissions on the traditional plans to benefit the investors. Traditional plans sold today are unlikely to give return of more than 6% p.a. and are unlikely to beat inflation in the longer run,” said Mr Maalde.