The new product regulation for life insurance policies has reduced the minimum sum assured requirement from a minimum of 10 times the annual premium to seven times the annual premium. While this makes the minimum life insurance cover more uniform across age groups, it raises some concerns. The reduction in life insurance cover may translate into better returns for investment-linked products, but it could be counterproductive given that these policies won’t enjoy tax benefits if the sum assured is not at least 10 times the annual premium. Disha Sanghvi asks experts how the new rules help
Limited uptake, impact likely, especially on those under 45
—R.M. Vishakha, managing director and chief executive officer, IndiaFirst Life Insurance
The recently introduced product guidelines are very customer friendly, largely improving flexibility and continuity options.
Reducing the minimum cover required under a savings product to seven times the annual premium versus 10 times earlier is interesting. It may be noted that this was the case for customers of age 45 and above even under the previous guideline. So the change is only for customers under age 45. The only reason for a customer to opt for this will be not having a high mortality charge eat into their investment portion at an older age. But it has not been a popular choice among customers above age 45 even now.
Further, insurance is a tax-efficient and long-term risk management tool that helps one save in a disciplined manner while enjoying a certain risk cover. Lowering the coverage makes the maturity proceeds taxable and hence the option less attractive.
Hence, I see this option having limited uptake and impact, especially on customers under age 45.
This change by itself won’t lead to instances of underinsurance
—Tarun Chugh, managing director and chief executive officer, Bajaj Allianz Life Insurance
As the new regulation by the Insurance Regulatory and Development Authority of India (Irdai) prescribes only the minimum amount, customers can continue to choose the multiple as per their needs.
Customers get a wider choice and more flexibility to decide their life cover. For instance, a unit-linked insurance plan (Ulip) holder, who has insured him/herself sufficiently via existing insurance policies, will have the choice to take lower cover in new products compliant with the revised product regulations.
Additionally, 10 times annualized premium is required for tax exemption, as per the current income tax laws. Given this, customers will tend to take 10 times annualized premium, especially those who are looking for tax benefits.
So, the change by itself shouldn’t lead to underinsurance. Yes, this can lead to better or higher returns. This will be the case, if the customer decides to take lower insurance cover based on his or her needs, the cost of life insurance cover will come down.
Concern over tax benefit on plans with low sum assured
—Kapil Mehta, co-founder, SecureNow Insurance Broker
Isee the changes in minimum sum assured as a simplification of product structures that are easier to understand. Previously, sum assured levels differed by age. These have now been collapsed into a single, minimum prescribed rate. The changes should be viewed in entirety.
The lower sum assured should result in better returns because less mortality charges will be deducted. The impact will not be significant because the reduction is small.
There is significant underinsurance but the solution to that is in selling term insurance rather than investment-oriented products, which will not be able to bridge the protection gap cost effectively.
However, I am concerned about how the lower sum assured will be treated from a tax perspective. If products with a sum assured multiple of premium less than 10 but higher than the new minimum of seven are not provided tax benefits on premium payment and maturity, then that is likely to lower the overall returns.
Reducing cover in investment plan will bring down charges
—Mahavir Chopra, director of health, life and travel insurance, Coverfox.com
When you are buying an investment product, you should first evaluate if the plan is effective in helping you achieve your long-term (more than 10 years) goals within your risk appetite. One should, therefore, look at charges, fund allocation, ratings and past performance against the benchmark.
Investment products should not be bought with the primary purpose of building financial security for your family. The minimum 10 times or seven times cover on the premium amount should be looked at only as a supplementary insurance cover on your financial goal.
You should also keep in mind that a life insurance investment product with less than the stipulated cover will not be eligible for deduction under Section 80C. Hence if you have a secondary purpose of getting tax deduction, you must ensure that you take the minimum cover required for that. But reduction of cover in an investment plan will only help reduce charges and improve your long-term returns.