Home / Money / Calculators /  Life insurance agents make one last push before Oct

Have you recently received an email or SMS, asking you to hurry up and buy a life insurance policy before October? If yes, then don’t pay heed.

Messages such as these are doing the rounds and claiming that policies bought after October will come with fewer benefits. In fact, Mint Money is privy to one such email correspondence from an agent with the Life Insurance Corp. of India (LIC). The email claims that LIC will withdraw all its plans by 30 September and will re-launch new plans with fewer benefits.

The truth, however, is quite different. From October, the Insurance Regulatory and Development Authority’s (Irda) new product regulations will kick in, making the design of insurance policies a tad better and that will work for you.

Before moving on to understand the agents’ urgency in selling the policies, let’s see what will work in your favour after October.

What works for you?

In 2010, unit-linked insurance plans (Ulip) went through significant reforms, so there’s no change on that front. But post-2010, the industry moved to traditional plans. Traditional plans, too, invest your money, but unlike in a Ulip, here the returns are not market-linked and the costs are not disclosed; returns either come in the form of annual bonuses or are guaranteed upfront.

It is these plans that will look different from next month. Here are the two big changes that will work for you.

Better surrender value: If you decide to exit your policy mid-way, you will be entitled to a higher surrender value under the new rules.

Right now there aren’t fixed rules, but usually you don’t get any money back if you surrender your policy before paying premiums for three years. After three years, the policy gives a residual or surrender amount that is usually 30% of all the premiums paid minus the first-year premium.

From October, your eligibility for getting a surrender value will depend on the premium paying term that you choose. If your premium paying term is less than 10 years, then you become eligible for a surrender value after paying premiums for two years. For tenors more than 10 years, you become eligible after paying premiums for three years. In this case, the minimum guaranteed surrender value will be 30% of all the premiums paid. From the fourth year onwards, the minimum guaranteed surrender value will increase to 50% of all the premiums paid until the seventh year. Thereafter, insurers will have to file a surrender value with the regulator.

“The surrender value under the policy will increase gradually over the policy term with surrender value being at least 90% of the premiums paid during the last two policy years," said V. Viswanand, director and head, product solutions management, Max Life Insurance Co. Ltd. This is the minimum guaranteed surrender value that the insurer will have to pay.

On top of that, insurers can also give you a higher special surrender value. “Special surrender value varies with the overall investment experience and it’s greater than or at least equal to the minimum guaranteed surrender value," said Viswanand. Special surrender value begins to swell up only as the years progress, so surrendering your policy early may only leave you marginally better. “At an assumed 8% growth, a typical 10-year premium payment endowment product bought for a 35-year-old for a term of 20 years on an annual payment of 20,000, the special surrender value in the third year would be 53% of all the premiums paid, whereas 209% in the 20th year," said Viswanand.

Higher death benefit: So far, traditional plans have no rules on the minimum sum assured that insurers need to offer on a given premium. This rule was dictated more by the tax benefits insurance policies were eligible for. Till FY12, insurance policies with a sum assured of at least five times the annual premium were eligible for tax benefits. From FY13, this changed to a sum assured of 10 times the annual premium.

Now even Irda has mandated that 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. But for policies with tenors of less than 10 years, the sum assured limit has been reduced to five times the annual premium. That said, at any point the death benefit will have to be at least 105% of all the premiums paid till date. Do keep in mind that to enjoy tax benefit, you will still need a death benefit that’s at least 10 times the annual premium you pay.

Agents’ urgency

Thanks to the new rules, insurance intermediaries will now really have to pull up their socks. Simply put, they will have to work harder to earn maximum commission.

Agents’ incentives have now been linked to the premium paying term (the tenor for which the policyholder pays premium regularly) of a policy.

“Linking commissions to the policy term (the term for which insurance remains valid) may not have helped much because agents would have sold long-term policies with very short premium paying terms. By linking commissions to the premium paying term, Irda has ensured that policies are sold for the long term. But it’s a much difficult task to get the investors to commit for the long term, proper training and serious agents are needed for long-term products," said Manish A. Shah, co-founder and CEO, Bigdecisions.in, a portal that aids financial decisions through financial tools.

For a premium paying term of five years, agents will get up to 15% of the premium as commissions in the first year. This first year commission will increase to a maximum of 35% in case the insurer is more than 10 years old and 40% for insurers that are less than 10 years old, if the premium paying term is 12 years or more.

New products

Even for the insurers, these are tough times. They will need to re-file all their traditional products with Irda and with the deadline less than a fortnight away, insurers will be pressed for time to train their intermediaries on new products. The fact that Irda will need to clear products of almost 24 insurance companies may lead to a lot of backlog. “It appears that the life insurance industry is not in a position to undertake the exercise of changing their traditional plans before 1 October. They may seek an extension of the deadline as they did for group products," said R. Venugopal, retired executive director, LIC.

What should you do?

Traditional plans will now have a better surrender proposition and a higher sum assured, but that shouldn’t convince you to buy a policy.

In order to provision for a higher sum assured and surrender value, insurers may need to increase the premiums or lower investments benefits. “To improve the surrender value, either the commission rates for the agents will need to be further reduced or a slight increase in the premium of some of the products will need to happen," said Venugopal.

For you, this means you still need to look at what you buy in the name of insurance. “From October, insurance policies will offer more flexibility. So for those who want a bundled insurance product, waiting for a few more days is advisable. But if you want better returns, then buy a term plan and invest in products like fixed deposits," said Shah.

Don’t buy a policy just because the rules have become friendlier; what it offers is still critical to making a decision.

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