Life Insurance: What has changed during the year and how it affects you

Mahavir Chopra

The Insurance Regulatory and Development Authority of India's (IRDAI) primary aim is to prevent the mis-selling of products. Keeping up with its objective this year, IRDAI has announced a slew of changes to the non-linked as well as linked products offered by the Life Insurance Companies in India. Let's have a look at how these changes would affect the policyholders and prospective buyers.

Life insurance products are often the most mis-sold ones in the entire bouquet of investment products. The products, if not properly understood, can sound complicated. This further adds to the risk of mis-selling. To keep this risk in check, the insurance regulator has been introducing various guidelines and changes during the year.

Recently, the Insurance Regulatory and Development Authority of India (IRDAI) has further simplified both traditional and unit-linked insurance products (ULIP) products offered by life insurers. These changes are going to impact life insurance products like term, endowment, ULIP and pension plans, and will end up becoming more beneficial to the customers at large.

These changes can be broken down into three parts: suitability information, product structure and pension plans. Let's take a look at the changes that have taken place.

1. Changes in the pre-application process requiring suitability information: Under this directive, life insurance companies, agents, and intermediaries are to collect suitability information like age, income, family status, life stage, financial goals and insurance plans already bought. This information has to be collected from every prospective buyer and then only can a product recommendation be made. This directive will not apply to pure term and pure health insurance products.

For ULIPs, there should be a clear indication of how the premium paid is utilised towards charges or from the fund balance, and the balance fund at the end of the first year and subsequent years.

This is an important step because if the customer's background, goals and expectations are not understood, the perfect plan and right fund allocation cannot be advised by agents or intermediaries. The regulator has made the right decision in making it mandatory for insurers and intermediaries to first understand the customer's profile, and his needs and goals, before advising any specific investment plan to them.

2. Changes in life insurance product structure

• Reduction in Life Cover: The minimum life cover amount has now been reduced from the current 10 times the annual premium till the age of 45 years and seven times the annual premium for age above 45 years, to seven times the annual premium across all ages for regular and limited premium payment plans. The sum assured to be offered under single premium products would continue to be 1.25 times the single premium.
  
  People who already have adequate term insurance cover and are now looking at life insurance products as an investment option, can now get better returns from their investments. The benefit of reduction in the sum assured would be more visible as a benefit in ULIP products, as the mortality charges would come down and more amount would be available for utilization towards their chosen funds. It is also important to know that it's not mandatory to buy a policy with the minimum sum assured of seven times. You can go for a higher sum assured, thereby, you would not be worried about the tax benefits going away as the tax benefits outweigh the mortality rates.

• Direct ULIP rider premium payment: Previously, the rider cover expenses were recovered by cancelling units from the policyholder's unit balance. Insurers can now collect the premium towards the rider attached to ULIP either as a rider charge or directly through a level rider premium. This will help policyholders get better visibility on their investment.

• Smaller waiting period for acquiring surrender value: Policyholders can now surrender non-linked traditional insurance plans in a time-frame of two years instead of three. This change will help people drop out from plans prematurely in case they have second thoughts or need the money urgently. However, you must be careful and understand whether such plans meet your financial goals before investing.

• Higher revival period: The revival period available under a life insurance plan has also been increased. Before the new regulations came into effect, policyholders could revive their policies within a period of 2 years from the date of the last unpaid premium. Now, as per the new guidelines, ULIP can be revived within a period of three years, while non-linked insurance (traditional) plan can be revived within a period of five years from the date of the first unpaid premium.

• Option of paying reduced premium: While taking life insurance plans is a long-term financial commitment to invest, there can be an instance when an investor is unable to make the payment due to a financial crunch. Earlier, the policy holder had to either pay the entire amount committed or lapse the policy till the money is available. This had resulted in huge losses of hard money to policyholders. The regulator has now introduced the flexibility to reduce their premiums after five years of term. Through this flexibility, a policyholder can reduce their premiums by 50 percent after the fifth policy year and keep themselves covered at the same time.

3. Changes in pension plans:

• Choice in buying annuities: Pension policyholders now have an option of buying an annuity plan from the maturity proceeds of their pension plan, from any of the life insurers. With this liberty, policyholders are now free to choose a good annuity plan that provides better returns to them from the open market.

• Higher equity investment for ULIPs: Policyholders now have an option to forgo the assured benefit offered on the pension products, and invest more in equity funds, to generate more returns by the time they retire. This change will help revive the demand for pension plans that have seen a great slump in the past years.

• Increased commutation value: In older pension plans, the policyholder could commute only up to one-third of the policy proceeds, while the remaining amount had to be compulsorily utilised for buying an annuity plan. The new changes will now provide a policyholder with 60 percent of their maturity benefit for commutation.

Along with these changes, the regulator has also stressed on providing agents and intermediaries proper training, so that they have a sound understanding of equity markets, including the risks involved before they advise policyholders. This will greatly improve the customer experience as all the pieces of information, doubts, queries would be solved before buying a life insurance plan.

A life insurance plan helps an individual protect their family from financial distress and support when the need arises. Simplified guidelines and easy-to-understand products will surely help increase the penetration of insurance products among the masses.

(The author is Chief Business Officer, Coverfox.com)