The new guidelines issued by IRDA aim to make insurance policies more customer friendly
The Insurance Regulatory and Development Authority (IRDA) has notified changes made to the guidelines on design of life insurance products in the gazette in February 2013. All existing group products will stand withdrawn from 1 July 2013 and all individual products from 1 October 2013.
These guidelines, effective October 2013, aim to make insurance policies friendlier. Listed below are some salient features of these guidelines.
The new guidelines have introduced three broad categories of products—Traditional insurance plans, variable insurance plans (VIPs) and unit-linked insurance plans (ULIPs).
Traditional plans: According to the guidelines, the product design of traditional plans would remain almost the same. These plans would continue to come in two variants: Participating and non-participating plans.
For participating polices the bonus is linked to the performance of the fund and is not declared or guaranteed before. But, the bonus once announced becomes a guarantee. It is usually paid in case of death of the policyholder or maturity benefit. This bonus is also called reversionary bonus.
In case of non-participating policies, the return on the policy is disclosed in the beginning of the policy itself. In both cases, a policyholder should calculate the net return to assess the total costs.
New traditional products will have a higher death cover. For regular premium policies, the cover will be 10 times the annualised premium paid for those below 45 and seven times for others. The minimum death benefit in case of traditional plan is at least the amount of sum assured and the additional benefits (if any).
ULIPs: In case of ULIPs, life insurers will now have to inform policyholders of the reduction in yield of their ULIPs on a monthly basis. Reduction in yield—difference between gross and net yields (expressed in %)—refers to the lowering of investment growth within a fund due to various charges.
The net yield can be arrived at after deducting all prescribed charges from the gross yield. Insurers will also issue annual certificates mentioning the premiums paid, charges and taxes deducted from the fund value, and the final payments made.
Variable insurance plans: The guidelines have mentioned that VIPs will guarantee a certain minimum rate of return at the beginning of buying a policy—though they are linked to an index. As VIPs will be treated at par with ULIPs, those products will follow the same commission package for ULIPs. Under linked products, agents are entitled to commission of up to only 10%. The charge structure and discontinuance norms of VIPs will be in line with ULIPs.
This basic minimum rate of return is also called floor rate. Additional benefits depend on the type of the policy. In the case of a non-participating VIP, the additional benefit will be mentioned at the time of buying the policy and may accumulate in the policy at specified intervals.
Participating VIPs normally provide a regular non-guaranteed bonus, which will be guaranteed once declared. Each policyholder will have a policy account in which the premiums—net of charges—will get credited. The minimum floor rate and additional rates will apply to this balance. On maturity, the policyholder will get the value in the policy account.
The IRDA guidelines have reduced commissions on short-term policies and have linked the quantity of commissions to the premium paying period for all products.
Agents of single premium non-pension products will receive remuneration of up to 2% of the premium paid. In case of regular premium insurance policies, a policy with a premium paying term of five years will pay up to 15% in the first year, 7.5% in the second and third year and 5% subsequently. As the premium paying term increases to 12 years and above, the commissions payable in the first year increases up to 35% in case the company is at least 10 years old and 40% in case the company is less than 10 years old. The regulator has framed the entire format on the basis of tenure of the policies
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.
Death benefit & surrender value
The minimum death benefit in case of VIPs and ULIPs is the policy account value or higher of the two. The minimum guaranteed surrender value for traditional plans has been increased. For traditional plans, with a premium paying term of 10 years or more, there will be a guaranteed surrender value after three years. For premium paying terms of less than 10 years, the guaranteed surrender value will accrue after the second year. This guarantee surrender value will be 30% of total premiums paid.
Currently, the guaranteed surrender value is usually 30% of all the premiums paid minus the first-year premium and is paid only if premiums have been paid for three years. According to the new guidelines, the surrender value becomes 50% between the fourth and the seventh years, after which the insurer would have to file a surrender charge that needs to be cleared by the regulator.
The IRDA in February 2013 has also issued guidelines to standardize health insurance in India. Now, all health insurance policies would be renewable for lifetime and will have an entry age of at least 65 years. All policies except customised ones will be renewable for life time. Insurers have to settle claims within 30 days after the receipt of all the documents. The IRDA has introduced 15 days free-look period—A period where a new insurance policyholder is able to terminate the contract without penalties such as surrender charges.
In case of a claim, no-claim bonus can be reduced proportionately, however it won’t be zero. In a health insurance policy, when a renewal is made without any claims in the preceding period of the policy, the insurer offers a bonus to the policyholder. This bonus is usually in the form of a discount in the premium around 5% for every claim-free year. The bonus can go up to 50%, provided no claim is made for 10 consecutive years. Any discount or loading in the renewal premium will be mentioned to the policyholder at the time of policy renewal.