IRDA Guidelines Effective 01-JAN-2014
The views / opinion expressed on this page is based on the interpretation of IRDA Gazette from February 2013 by the author on few selected points from the Gazette. You might have been hearing, reading or watching views on changes to Life insurance policies after 31-DEC-2013. All of what you have heard, read or watched on TV is an opinion/interpretation. Here is my version of opinion on the matter. I highly encourage you to form your own opinion by reading the Gazette on your own. Guidelines are comprehensive, I am putting up original gazette on this page as attachments to help you easily find it.By reading further you absolve the author of any responsibility of loss of any kind.
I cannot imagine even one current LIC product to continue in the current form. All products needs revamp. Closure of many have already been announced. A change also creates new opportunities and I am hopeful LIC will come out stronger with these changes and customers with also welcome the change. Few of these changes benefit customers depending on their goal with the policy. I have also placed copy of the original gazette on this page for you to read the documents yourselves and form an opinion.
Service tax to be collected above the premium amount
IRDA guidelines mandate insurance companies to collect service tax above the premium amount. Premiums of existing policies where service tax was not charged separately will continue to remain as they are today.
Government has already been collecting service tax from LIC. LIC so far has not been charging its customers but has been parting with this money from its earnings. There are two ways to look at it one may interpret it as extra amount on premium that affects your returns from the policy or the other way to look at it is since LIC has already been paying this from their own profits this change will mean a bigger profit for LIC hence better bonuses for end customers and shareholders.
Few current products like Jeevan Ankur, New Jeevan Nidhi, Jeevan Akshay already charge service tax above the premium as you may be aware of.
Minimum Death Benefit
- On Non-Single-Premium minimum death benefit will be 10 times the annual premium for a person aged up to 45 years and 7 times annualized premium for others.
- On Single-Premium policies minimum death benefit will be 125% of the premium paid for a person aged up to 45 years and 110% annualized premium for others.
If you are looking as LIC policy as one of the instruments for investment, you need to act fast. After the guideline comes into effect more part of your premium will go towards providing you death benefit hence your final maturity amount on endowment policy will be compromised. All current LIC plans needs to revamped to comply with the guidelines. If you want better returns buy LIC endowment plan before the guideline comes into effect, if you want better death benefit you may wait.
E.g. In the product number 14(The Endowment Assurance Policy) Annual premium for 1 Lakh sum assured for 5 years is Rs. 21153 which is less than 5 times. This will not be allowed once the new guidelines comes into effect.
Guaranteed Surrender Value
IRDA guidelines mandate that for policies that have paid regular premiums:
- Return of 30% of premiums paid if surrendered in between 2nd and 3rd year
- Return of 50% of premiums paid if surrendered in between 4th to 7th year
- Return of 90% of premiums paid if surrendered during the last 2 years of the policy.
Surrender value will increase after this guidelines comes into effect. This benefits people who have to surrender due to variety of reasons.
Benefit Illustration at 4% and 8%
All insurance products shall provide the prospective policyholder a customized benefit illustration, illustrating the guaranteed and non-guaranteed benefits at gross investment returns of 4% and 8% respectively and as specified by IRDA or Life Insurance Council from time to time. Most important part is this benefit document will be signed by both customer and agent and will become part of your policy file with the insurer.
Customers have often complained of mis-selling. I hope this signed document will educate customers about the maturity benefits better. It will keep the expectations real. Currently insurers are providing you benefits are 6% to 10% on demand. This document however will not talk anything about the guaranteed returns and it is advised that customers go with insurance companies that have a proven track record of generating better returns.
Advance Premium not allowed
The premiums will only be accepted 30 days before the actual due date. For monthly premium mode insurer may accept three months advance premium.
People who have yearly premium policies with due date in late March may not be able to pay and submit 80CC tax proofs to their employers in time.
Furnishing Statement of Accounts
The statement of policy account shall be sent to the policyholder at least once a year in a specified format. Please click here for the format.
This is a welcome move from IRDA a customer will be able to track progress on the policy year over year. The statement covers details of all the additions like bonus etc. as well as deductions like administration charges etc.
There will be two types of product par and non-par products. Par(participating or with profits) products are ones where returns on maturity of policy will depend on profitability of the company, non-par on the other hand have no relation to profitability of the company and companies will be declare maturity value depending on criteria they decide. For par products only allowed things to be added in maturity would be Annual Bonus + Interim Bonus + Final Additional Bonus.
Insurance companies are expected to launch many non-par plans in coming days. This will lead to an interesting situation there are already insurance companies that are bleeding and are not profitable. They are the ones expected to announce bigger guaranteed values on maturity. How long will they be allowed to bleed further will be a choice of shareholders of those companies. Perhaps it is because of this IRDA will be doing financial viability of the products once a year.
If you are interested in knowing about profitability of all the insurance companies do not forget to visit IRDA public disclosures:
This impacts products like the very popular Jeevan Saral as it was paying loyalty additions. Products like New Bima Gold, Bima Bachat also get impacted because of this. Personally I feel LIC has been and will always be a profitable and ethical company. I am hopeful both par and non-par products of LIC will provide benefit to customers. I am not only an agent of LIC but a customer as well – lot of our personal family investment is also with LIC.
Policy Term & Premium Payment Term
Minimum policy term for any product will be 5 years and minimum premium payment term for other than Single Premium policies will be more than 5 years
Life insurance should always be long term. Start early with life insurance policies when you are young and healthy and continue them to you retirement age. Even if your goal is investment a long term investment has always given more returns from LIC policies than a short term plan.
New Mortality Tables
Life expectancy in India has increased over the years due to various factors like advancement in medical technology, more people being able to afford medical benefit etc. Difference between the newer 2006-08 mortality table over the older 1994-96 table is big. E.g. Mortality rates at 30 years of age have improved around 10% and improvement is around 8% at age of 50 years. This means all life insurance policies will change you less for the death benefit and in case of endowment plans more money will be used for investment. However one thing to note is all policies will now offer greater death benefit hence the eventual net effect on final maturity amount is yet to be seen.
Options to switch policies sold in transition period
All insurance companies shall give an option to policyholders that all policies sold during the transition period (20-FEB-2013 to 31-DEC-2013) will have an option to switch over to the modified version, if any, once introduced
It is good news isn’t it? Heads I win, tails you lose! Newer LIC plans are yet to be introduced hence no one knows the effect of these guidelines on the plans. So is it not better to buy it now and switch if you like modified version of the policy better.
Multiple policies of the same nature and term
Splitting of policies shall not result into any increase, directly or indirectly to the policyholder by way of fees or charges in whatsoever name at any time during the term of the policies and not just at the inception.
This only means you will not be able to take same policy of the same tenure. E.g you cannot take five Jevan Anand policies for 10 years with variable sum assured. If you are a fan of combinations you need not worry. E.g you will be able to take two Jeevan Anand policies one with term 15 years and other with term 18 years.
Premiums will be level all throughout the term
Except for fund based products premium chosen at the time of selling the policy shall continue to be charged throughout the term
This has been the case of traditional endowment policies. ULIP is not getting impacted hence no reason to worry. You should still be able to pay your top ups in case of ULIPs
There are no major changes in agent’s commission structure.
I advise both agents and customers to focus on getting the right requirement of life insurance fulfilled. More agent’s commission should never be the reason for an agent to sell a particular plan. Also for a customer a less commission does not mean a better plan. Make sure you engage with an agent that looks after your real life insurance needs.
Financial viability of each product to be filed with IRDA
An appointed actuary will review financial viability of each product at least once a year. If not found viable the actuary will revise the product under file and use procedure.
It is good that IRDA regulates financial viability of products. It has often been seen that companies continue to bleed through an unviable product and then exit business.
Standard Proposal Form
A new standard proposal form consisting of four parts, namely:
(A). Details of the prospect (B). Specialized/ Additional information. (C). Suitability Analysis (D) Recommendation
has been made mandatory by IRDA. Section A and D are standard and mandatory, Section B may be modified as required by the insurance company. You can see format of the IRDA standard proposal form here.
A standard form will help people understand the application procedure. You may change your insurer form time to time but a standard form will help you be acquainted with the
application procedure. Please review the form to understand how is a prospective customer educated just by filling up the suitability analysis section of the form.
Changes to Pension Plans
All individual pension products shall have explicitly defined assured benefit that is payable on: Death or at Vesting
People do not want surprises with the money they save for retirement. I welcome this move and should keep the expectations from a pension plans realistic. Lot of mis-selling has happened in this domain in the past.
In a really unfortunate incident of a suicide within 1 year, 80% of Premium paid so far or surrender value payable will be returned to nominees. Beyond 12 months policy holder will be entitled to minimum of surrender value / policy account value.
Human life is the most precious thing in this world. There are plenty of resources available on the internet for friends and family members to help people with suicidal tendency. No problem in life is a valid reason for a suicide.
Guidelines on Fraud or Misrepresentation
In case insurance company detects fraud or misrepresentation by the policy holder company will immediately cancel the policy after paying surrender value. Subject to the fraud or misrepresentation being established by the insurer in accordance with Section 45 of the Insurance Act, 1938.
Be fair while buying LIC policies, you not only lose money but also risk a legal action depending on nature of the fraud.