One of the major changes in the draft from current regulations is the reduction of the insurance cover in a bundled policy. Today policies must offer a minimum 10 times of the premium as sum assured (if the premium is ₹ 1 lakh, the sum assured must be ₹ 10 lakh at least). This has been brought down to seven times, or ₹ 7 lakh of sum assured on a ₹ 1 lakh premium. Such policies will fall outside the tax benefit rules and will not get the Section 80C ( ₹ 1.5 lakh deduction) or the tax-free status of the proceeds of the policy on maturity. The insurance industry is not known to think in terms of investor benefit and this may lead to policies being sold without the buyer knowing about the lack of tax benefit.
The other change gives you slightly more money in a traditional plan if you decide to stop paying premiums after the first two years. Traditional plans cut a hefty part of your investment if you stop paying premiums before the policy matures. I’ve found it fascinating how risk-averse, capital-preserving Indian investors continue to buy and stop funding plans that gobble up their invested money. The new rules say that if you pay two premiums in a traditional plan and then don’t pay the third premium, you will get 35% of your money back. If your premium was ₹ 1 lakh a year, then after paying ₹ 2 lakh, at the end of the second year, when you don’t pay the third premium, you will get ₹ 70,000 back. If you stop the policy near maturity, you will get back 90% of your money. Suppose you stop your 20-year policy in year 18, then you get ₹ 17.1 lakh of the ₹ 19 lakh invested. Irdai has done little to stop the gobbling of the premium by insurance firms in these plans—you still lose all your money from the first premium if you don’t pay the second premium.
