Pradeep Gaur/Mint
Pradeep Gaur/Mint

Agent commissions in insurance are linked to the policy’s premium payment term

An agent's commission comes from the premium you pay for your policy

One of the changes instituted by the Insurance Laws (Amendment) Act, 2015, was to give the insurance regulator more powers to decide the remuneration (commission) for an insurance intermediary from an insurance policy. Limits on commissions for an insurance agent have been described under section 40A of the Insurance Act, 1938.

Staying within the overall limit, the Insurance Regulatory and Development Authority of India (Irdai), in its linked and non-linked product guidelines of 2013 linked commissions to the premium payment term (PPT) of a policy to ensure that agents selling long-term products get higher commissions. PPT is the term during which the policyholder has to fund the policy by paying premiums, whereas policy term is the period during which the insurance cover is active. So, if the policy term is 30 years and PPT 15 years, the policyholder will have to pay premiums for 15 years for an insurance cover of 30 years. Until Irdai comes up with new commission limits, the industry is following caps prescribed in product guidelines.

An agent’s commission comes from the premium. Thus, it’s important to know how much an insurer can charge from your money to pay its intermediary.

LIFE INSURANCE

According to the Insurance Act, 1938, an insurer that is less than 10 years old can pay up to 40% of premium as commissions in the first year to the agent who sells the policy. In the second and third years, it could pay a renewal commission of up to 7.5% of the premium and for the remaining term, 5% of premium. For a company older than 10 years, first-year commission is capped at 35%.

According to new rules, an insurer can give commission up to a maximum of 40% in the first year (35% for companies older than 10 years), but only if the agent sells a policy with a PPT of 12 years or more. If she sells a policy with a 5-year PPT, she can get up to 15%. This rises by 3 percentage points with increase in PPT by a year. So, for a policy with a PPT of 6 years, first-year commission limit will be 18%, 21% for PPT of 7 years, and 33% for 11 years. Commission limit from second year onwards remains unchanged.

For single-premium policies, commission is capped at 2% of premium. For brokers, cap on commission remains the same as it is for agents in first year till the PPT is 10 years. If higher PPT, maximum is 30%. In subsequent years, she is entitled to up to 5% of premium.

PENSION PLANS

Pension plans, on the other hand, come with a lower commission because they are easier to sell, and the rates have been prescribed so in the insurance Act. For single-premium plans, commission is 2%. For a regular premium policy, commission limits are unchanged. Commission payable in the first year is capped at 7.5%; and in subsequent years, 2%.

The stipulated limits are the maximum that an insurer can charge towards commissions. But the actual commission would vary according to product.

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