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Business News/ Money / Calculators/  Irda has relaxed minimum sum assured on short-term policies
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Irda has relaxed minimum sum assured on short-term policies

The regulator may have reduced the sum assured for the insurer, but not much will change for you.

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The Insurance Regulatory and Development Authority, Irda, announced new product regulations for life insurance policies in April this year. According to the regulations, the minimum sum assured or the death benefit on a life insurance policy shall not be less than 10 times the annual premium for individuals below 45 years of age. So if an individual buys a policy with an annual premium of 1 lakh, the minimum sum assured would have to be 10 lakh. However, Irda has relaxed this limit for regular insurance policies with a shorter tenor through another notification issued on 21 June. Here’s why the norms were relaxed.

The minimum limit on sum assured

To ensure that life insurance policies offer customers a decent cover, Irda mandated a minimum sum assured of 10 times the annual premium for all the life insurance policies for individuals below 45 years of age. For individuals above 45 years of age, the minimum sum assured is seven times the annual premium. This minimum limit was first adopted by the then popular unit-linked insurance plans or Ulips in 2010 and was made the norm for all policies this year. Earlier, in case of Ulips, the minimum sum assured was five times the annual premium, but for traditional or non-linked insurance policies there wasn’t a minimum sum assured threshold. However, post the regulations this year which will become effective from October, insurers have expressed difficulty in designing policies with shorter tenors with a minimum sum assured limit of 10 times the annual premium. Insurers say that a high sum assured over a shorter period means more cost that significantly affects returns. Irda has, therefore, reduced the sum assured limit to five times for policies with a term of less than 10 years for all individuals. However, Irda has mandated that the sum assured or the death benefit at any given point in time would not be less than 105% of all the premiums paid. This means if a policyholder say dies in the sixth policy year and pays a premiums of 10,000 and has a sum assured for 50,000, the insurer will pay 63,000 (105% of 60,000 premiums paid so far).

What it means for you?

The regulator may have reduced the sum assured for the insurer, but not much will change for you. First, it’s advisable to go for a higher sum assured that is equal to 10 times your annual income. Second, from 2012, the rules on minimum sum assured for tax benefits have been changed. Now the sum assured or death cover needs to be at least 10 times the annual premium to get tax deduction benefits up to 1 lakh under section 80C of the Income-tax Act. Also, under section 10(10D), maturity proceeds, would be tax-free if the premium is not more than 10% of the sum assured or the sum assured is at least 10 times the premium.

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Published: 04 Jul 2013, 06:26 PM IST
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