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Tuesday, March 19, 2013

IRDA guidelines impact commission and surrender value of traditional products


The insurance regulator’s guidelines will see a push for selling policies with a term of 12 years or more as it keeps the intermediary commission intact. Surrender value is improved, but it may not be enough considering the gap with ULIP surrender value. Nothing much to cheer for consumers

The Insurance Regulatory and Development Authority (IRDA) has issued guidelines, effective October 2013, for life insurance policies which will have an impact on the commission and surrender value of traditional products (endowment, money-back, whole-life and term plans). Short-term policies will have a lower commission than traditional products with a policy term of 12 years or more. There was no such differentiation till now with agents getting 35%-40% of the first year premium as commission. Life Insurance Corporation of India (LIC) agents will hold protest demonstrations in front of LIC branches across India on 20th March against the reduced commission in IRDA guidelines.

In case of regular premium insurance policies, a policy with a premium paying term (PPT) of five years will not pay more than 15% in the first year, 7.5% in the second and third year and 5% subsequently. Products with PPT of 12 years or more will have first year commissions up to 35% in case the company has completed 10 years of existence and 40% for the company in business for less than 10 years. Don’t be surprised if intermediaries are only interested in selling long-term life insurance products espousing benefits for disciplined savers.

Online policy sales and other direct sales of products will have no commissions and that benefit will be passed on to the policyholder. It is not clear how the benefit is passed to policyholder, if the same product is sold through agent versus direct sales. Will the policyholder buying the product through direct sales get higher bonus due to the saved commission? Otherwise, the customer will still go through agent route due to the prevalent custom of “commission sharing”.

The minimum guaranteed surrender value for traditional plans has been pathetic. The existing guaranteed surrender value is 30% of all the premiums paid minus the first-year premium and is paid only if premiums have been paid for three years. This has been improved to some extent by the guidelines. For traditional plans with PPT of less than 10 years, the guaranteed surrender value will accrue after the second year. For PPT of 10 years or more, there will be a guaranteed surrender value after three years. This guaranteed surrender value will be 30% of total premiums paid. The surrender value becomes 50% between the fourth and the seventh years. The surrender value after seven years will have to be cleared by the regulator.

While the improved guaranteed surrender value is a welcome move, its impact on the returns to the policyholders will have to be seen. This is because if there is higher number of surrenders, the insurance company’s performance will be impacted and hence returns in terms of bonus will be affected. But, if you are buying a traditional product with a thought of surrendering it during the policy term, then you should not be buying it at all.Moneylife does not recommend buying traditional products, as even after the guidelines, it will remain opaque and fetch low returns. While the industry trend has been to move from ULIP to traditional products, it is like jumping from the frying pan into the fire.

The minimum death benefit for single premium policies will be higher of 125% of the single premium, or minimum guaranteed sum assured on maturity, or any absolute amount to be paid on death. For those with age more than 45 years, it will be 110% of the single premium. For regular premium products purchased by policyholder of age less than 45 years, it will be higher of 10 times the annualised premium or 105% of all premiums paid on date on death or minimum guaranteed sum assured on maturity, or any absolute amount to be paid on death. For those with age more than 45 years it will be seven times the annualised premium.

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