Flexible and customer friendly norms for life insurance: Irdai proposes structural changes in linked, non-linked policies

By: | Published: November 6, 2018 12:32 AM

LIFE INSURANCE: Irdai proposes structural changes in linked, non-linked policies (Illustration: SHYAM Kumar Prasad)

After five years, the insurance regulator is in the process of reviewing the structure of linked and non-linked life insurance products. It has put out a draft paper which, among other things, proposes to make the minimum death benefit seven times for regular premium products and 1.25 times for single premium products. It proposes a definite sum if policyholders surrender the policy after two years. For pension products, Insurance Regulatory and Development Authority of India (Irdai) has proposed up to 60% of the pension maturity amount for commutation. The revival period in case of lapsed policies has been proposed for five years instead of two years at present.

Non-linked products

For all non-linked individual life insurance products, the minimum sum assured on death during the entire term of the policy shall not be less than seven times the annualised premium irrespective of age for limited/regular products and 1.25 times the single premium for single premium products. For this, the annualised premium will be the premium payable in a year chosen by the policyholder. At present, the minimum death benefit is 10 times of the premium for less than 45 years. For single premium products, it is 1.25 times the premium.

For participating products, in addition to the sum assured on death, the bonus/additional benefits as specified in the policy and accrued till the date of death will become payable on death as part of the death benefit, if not paid earlier. The insurer may pay the death benefit in lump sum or in instalments under the settlement option.

For pension products, on surrender/ vesting the policyholder can get two options: Either utilise the entire proceeds to purchase immediate annuity/deferred annuity from the same insurer at the then prevailing annuity rate, or, commute up to 60% and utilise the balance amount to purchase immediate/ deferred annuity from the same insurer. The guaranteed surrender value for non-linked policies would be applicable after two years of premium payment instead of three at present. The guaranteed surrender value will be 35% of total premiums paid less any survival benefits already paid, if surrendered between second year and third year. It will be 50% of the total premium paid if surrendered between fourth year and seventh year.

After five years, the insurance regulator is in the process of reviewing the structure of linked and non-linked life insurance products. It has put out a draft paper which, among other things, proposes to make the minimum death benefit seven times for regular premium products and 1.25 times for single premium products. It proposes a definite sum if policyholders surrender the policy after two years. For pension products, Insurance Regulatory and Development Authority of India (Irdai) has proposed up to 60% of the pension maturity amount for commutation. The revival period in case of lapsed policies has been proposed for five years instead of two years at present.

Non-linked products

For all non-linked individual life insurance products, the minimum sum assured on death during the entire term of the policy shall not be less than seven times the annualised premium irrespective of age for limited/regular products and 1.25 times the single premium for single premium products. For this, the annualised premium will be the premium payable in a year chosen by the policyholder. At present, the minimum death benefit is 10 times of the premium for less than 45 years. For single premium products, it is 1.25 times the premium.

For participating products, in addition to the sum assured on death, the bonus/additional benefits as specified in the policy and accrued till the date of death will become payable on death as part of the death benefit, if not paid earlier. The insurer may pay the death benefit in lump sum or in instalments under the settlement option.

For pension products, on surrender/ vesting the policyholder can get two options: Either utilise the entire proceeds to purchase immediate annuity/deferred annuity from the same insurer at the then prevailing annuity rate, or, commute up to 60% and utilise the balance amount to purchase immediate/ deferred annuity from the same insurer. The guaranteed surrender value for non-linked policies would be applicable after two years of premium payment instead of three at present. The guaranteed surrender value will be 35% of total premiums paid less any survival benefits already paid, if surrendered between second year and third year. It will be 50% of the total premium paid if surrendered between fourth year and seventh year.

Linked products

A unit-linked policy may only offer the following death benefits: Sum assured as agreed in the policy plus the balance in the unit fund or higher of the sum assured as agreed in the policy or the balance in the unit fund. All individual linked products will have either a guaranteed sum assured payable on death or a guaranteed sum assured to meet the health cover. In case of discontinuance of policy due to non-payment of premium, the fund value after deducting the applicable discontinuance charges will be credited to the discontinued policy fund and the risk cover and rider cover will cease.

All individual pension products will have explicitly defined assured benefit that is payable on death and may have a defined assured benefit payable on vesting. The defined assured benefit will be disclosed at the time of sale. Life insurers will use uniform definitions for charges.

Expert’s take

Anuj Mathur, MD & CEO, Canara HSBC Oriental Bank of Commerce Life Insurance, says the key theme appears to be to simplify the regulations and provide more flexibility to customer. At the same time, the regulations encourage innovation and nudge the industry towards offering better value to customers via product design. “Changes in product categories such as pensions and group products will allow customers more choice and flexible options. They would also benefit from changes in surrender value regulations such that for traditional products, particularly longer payment term policies, a surrender value is available to customers earlier during the policy,” he says.

Similarly, Vivek Jalan, head, Insurance Consulting and Technology, Willis Towers Watson, India says, the proposed changes, if implemented, will expectedly make life insurance product structures more flexible as well as customer-friendly—such as increase in revival period, reduction in nil surrender value period from three to two years, longer settlement period, allowance for fund switches; and other flexibilities in term of product structures. “These developments should foster healthy competition in the industry and provide opportunity for smaller players to find niche segments to differentiate themselves,” he says.

A unit-linked policy may only offer the following death benefits: Sum assured as agreed in the policy plus the balance in the unit fund or higher of the sum assured as agreed in the policy or the balance in the unit fund. All individual linked products will have either a guaranteed sum assured payable on death or a guaranteed sum assured to meet the health cover. In case of discontinuance of policy due to non-payment of premium, the fund value after deducting the applicable discontinuance charges will be credited to the discontinued policy fund and the risk cover and rider cover will cease.

All individual pension products will have explicitly defined assured benefit that is payable on death and may have a defined assured benefit payable on vesting. The defined assured benefit will be disclosed at the time of sale. Life insurers will use uniform definitions for charges.

 

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