Need-based cover

Written by Saikat Neogi | Updated: Mar 22 2013, 09:09am hrs
The new standard proposal form, which will apply to individual policies, will help reduce misselling

All life insurance companies will have to adopt a standard proposal form for a new business. The new form issued by the Insurance Regulatory and Development Authority (Irda) will contain four parts. The first section will contain mandatory details of the proposer like name, address, contact details and basic health details. In the second part, the proposer will have to submit a specialised health information like physical deformity, any accident requiring treatment, if absent from work for more than a week in last two years due to any illness, etc. The third section will be the suitability analysis like affordable contribution, span of work, income expenditure, financial details and the identified insurance needs. The final section will be product-proposed details like protection needs, life stage, details of commitment for the current and future needs, etc.

The agent will have to ensure that all the risk elements and details of charges are explained to the proposer. Irda says the objective of the standard proposal form for individual policies in life insurance is to ensure that it takes into consideration all the relevant questions that are required to understand the need for a particular product and make a recommendation to the prospect bringing in transparency and protect the prospects interest.

The new standard proposal, as of now, will apply to individual policies issued by life insurance companies, irrespective of the segment and type of the product. The obligations under the the new regulations will apply to insurers and intermediaries.

The regulator has made it mandatory that an insurer or agent or bancassurance or broker or the insurers employees where direct sales are involved, will have to make reasonable efforts to obtain a consumers suitability information prior to making a recommendation. Moreover, based on the suitability of information gathered from the prospect, the insurer or agent or bancassurance or broker or the insurers employees where direct sales are involved, must have reasonable grounds to believe that the product being recommended to the prospect is suitable for her.

In recommending the purchase of a life insurance product, the prospect has to be informed of the product available and the details of the features being recommended. This would include, but not be limited to the benefits, various charges such as surrender charge, administration charge and all other charges as applicable, market risks, etc. In other words, all relevant features of the product necessary for the prospect to make an informed decision, the Irda notification says.

Analysts say one must do homework properly before buying a policy. The most important component of a premium is mortality charges, or the charge that one has to pay for the risk cover. It is essentially the cost of the insurance cover, and the charge will vary with age, health, tenure, coverage amount and even the occupation of the life assured.

Most life insurance companies use the mortality table used by the countrys largest insurer, state-owned Life Insurance Corporation of India. Needless to say, it is the countrys oldest life insurer and has data of mortality across various geographies in the country. The younger the person, the lower will be the mortality charges and it will rise as one grows old. So, it is always advisable to take a life cover at a younger age, ideally immediately after getting the first job so that you have to pay lower mortality charges on a life cover. Similarly, the younger you are, the lesser the chances of ailments. Again, because of this, your premium amount would be low. And longer the tenure, the lower would be the premium paid.

Also, there will be premium allocation charges, fund management charges and policy administration charge, especially on unit-linked insurance plans. Premium allocation charge is the percentage of the premium that will be deducted from the premium and would also include the agents commission. The insurance company will charge a fund management fee for making investment on your behalf and conducting research for investing in the best stocks for maximum returns.

Now, to take additional benefits, one can opt for riders by paying an extra charge. Riders are add-ons and give the policyholder the option to enhance risk cover. It can sometimes be customised according to ones needs and can be bought in conjunction with the base policy at the time of the initial purchase. However, riders are optional and provide pure risk cover and do not have any investment or savings element to them. On a life insurance policy, the rider can be waiver of premium, guaranteed insurability, disability income, accidental and accelerated death benefit. The critical illness rider is important in the life insurance as it covers heart attack, stroke, cancer and surgery. Typically, riders are bundled with the base policy and do not have any additional administrative charges. In fact, Irda has now capped that the maximum premium that is paid for riders not more than 30% of the base policy cost. Thus, any benefit arising out of an individual rider cannot exceed the basic sum insured.

Policyholders can go for a critical illness rider where the sum insured is paid to the policyholder in case of a critical ailment. One must check the illnesses covered and the exclusions and be clear that a critical illness benefit rider and a pure mediclaim policy are two separate covers. A critical illness rider enjoys tax benefit under the Section 80D and proceeds received in the case of a claim are tax exempt under the Section 10 (10D) of the Income Tax Act.

For linked-plans, a policyholder will have to pay switching charges if he wishes to re-balance the investment portfolio and switch from one fund to the other in the same policy. Insurers usually charge a flat amount for the switch. And of course, if you surrender your policy before the date of the maturity, the insurer will charge a surrender fee. Irda has capped the fund management fees at 150 bps for policies with less than 10 years of maturity and 125 bps for those above 10 years of maturity.

All insurer will have to ensure a supervision system to ensure compliance of the new norms and maintain procedures for review of the recommendations made prior to issuance of a product. The review will be stored in physical or electronic format that accurately reproduces the actual document and can stand legal scrutiny, and the insurer will have to put in place a procedure to detect recommendations that are not suitable. Also, all the insurers, agents, bancassurance and brokers will have to keep the recommendation records and give it to Irda for inspection if it seeks.