With you and for you

One of the things that changed for the better is that regulations have made products more long term in nature, which is what life insurance products should ideally be. Agent commissions are now linked to the tenor of the product. So, more the duration of the policy, more the agent earns. “Regulations have made insurance products long term. So, distributors will now need to adjust to selling insurance for the long term," says G. Murlidhar, managing director, Kotak Mahindra Old Mutual Life Insurance Ltd.

Mint Money brings to you the key changes that took place this year and will hopefully go a long way in making insurance plans more friendly than their earlier avatars.

Not below this

A minimum limit has been set for the insurance cover or the sum assured that insurance policies will now have to offer. This is a step towards ensuring that adequate cover is provided.

This is how the insurance watchdog, Insurance Regulatory and Development Authority (Irda), has set the formula. The minimum sum assured or death benefit in a life insurance policy cannot 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 minimum limit is five times the annual premium amount.

That said, at any point, the death benefit will have to be at least 105% of the total amount paid as premiums till date.

This change also ensures that you are not sold pure investment products in the garb of insurance. However, if you want to avail the tax benefits related to insurance, you need to buy a cover that is at least 10 times the annual premium.

Not above this

Life insurance policies have now been put into three broad categories: traditional insurance plans, variable insurance plans (VIPs) and unit-linked insurance plans (Ulips).

Traditional plans are opaque products and can be divided into two types: pure insurance and insurance-cum-investment. Since costs aren’t explicitly mentioned, there is no cap on the costs for these. But limits have been placed on Ulips and the newly constructed category of variable plans.

Ulips, as you would know, are insurance-cum-investment products that invest a portion of your premium in the markets. VIPs, on the other hand, come with a sliver of guaranteed return, with additional benefits pegged to an index, guaranteed upfront, or given out as bonuses.

For these policies, the cost limit (indicated by the maximum reduction in net return) will not be more than four percentage points in the fifth year, coming down to a difference of 2.25 percentage points from the 15th year onwards. In simple words, what this means is that if the fund grows at a rate of, say, 10%, the costs should not drag the net return below 6% in the fifth policy year.

Lighter penalty

This is a big one in the interest of customers. High surrender charges is now a thing of the past. Now, if policyholders wish to discontinue their policies midway, the insurers can penalize them only till a point. In Ulips and VIPs, the maximum surrender charge (the amount that the insurer can levy if the policyholder decides to quit midway) is 6,000 in the first year; it then reduces to 2,000 in the fourth year, and becomes nil from the fifth year. For traditional plans, however, the surrender charge is still on the higher side. According to the new rules, you will become eligible for a surrender value after paying premiums for two years if the premium-paying term is lesser than 10 years.

If the premium-paying term is more than 10 years, you can get a surrender value after three years.

The insurer has to pay you a surrender value of at least 30% of all premiums paid initially. This level increases as you move closer to maturity.

Commenting on the impact of these changes, Sandeep Bakhshi, managing director and chief executive officer, ICICI Prudential Life Insurance Co. Ltd, says, “By changing the product structure, the regulations have shifted the burden of a mis-sell from the customer to the insurer. Now, it’s upon the industry to reach out to the customers with simpler products and encourage long-term savings."

Not only have these changes made the industry more customer centric, they are also a step towards stability since all companies will have to follow similar structures. This uniformity makes things less complex for the end user.

What doesn’t change for you as an investor is that you have to continue to be careful with what you buy. Life insurance policies are complex products and it’s important you understand the benefits completely and match them with your needs before you buy.