A slew of norms recently announced by the Insurance Regulatory and Development Authority of India will make insurance products more beneficial for policyholders. From now on, all savings products of life insurers must contain provisions for granting policy loans. Two, variable annuities can now be launched by the insurers.
At present, policy loans are mostly granted under some insurance plans which accrue surrender values after two or three years from the date of commencement of policies. However, loan facilities are not available under many savings plans.
Policy loans
Policy loans are available at rates of interest lower than the ones charged by financial institutions. Second, the borrower is not required to pay any fixed proportion of principal or interest at regular intervals. One may pay just interest or a part of the principal whenever they are in a position to repay something. The policyholder may also repay loans along with the regular premiums.
For a young policyholder, the savings in bank accounts may be inadequate or investments may be locked up in long-term securities, resulting in a cash crunch in the midst of an emergency.
For instance, a lot of medical expenses do not fall under the purview of ahealth insurance policy. In such a situation, a policy loan can be a valuable financial support to the insured. A policy loan is usually made available in one or two days and paperwork is also limited. Through the apps of the insurer, a policyholder can readily know how much policy loan he is entitled to, at any given point in time.
Variable annuity
The Irdai circular mentions that insurers have to invest 60-80% of the premium in fixed-income securities and the balance in equities or some benchmark indices. So, essentially, this is a market-linked annuity plan with the guarantee of a minimum pension under all circumstances but also with the possibility of earning high returns.
Many customers who are in a position to take some marker-related risk will opt for such plans. As the stock markets touch new highs, there is a chance of earning a higher return under variable annuity and consequently, higher annuities than under fixed annuity plans.
The regulator has taken certain precautions while allowing the insurers to launch variable annuity products. Such products can not be touted as investment products. As these are insurance products with assured benefits on death even during deferment periods, these have to be promoted as insurance products. Moreover, adequate, accurate, explicit and updated information has to be given for annuity payout options.
The writer is an insurance industry analyst