Have life insurance policy? Good news, your troubles may be over

The Insurance Regulatory and Development Authority of India (Irdai) has recently come out with proposed changes for linked and non-linked life insurance policies. These changes, if implemented, would mark a key transformation in how life insurance products impact policyholders. The proposed norms stipulate minimum death benefit for regular premium plans, guaranteed surrender value, partial withdrawal for linked pension products, and others. DNA Money spoke with experts to decode the changes for you. Read on.

Minimum death benefit
It has been proposed that the minimum death benefit would be seven times the annual income for regular premium products and 1.25 times for single premium products for all ages. Currently, for a person below 45 years, the minimum death benefit is 10 times the annual income. For those above 45 years, the same is seven times the annual salary, to be eligible under Section 80C to avail tax benefits.

“The proposal will benefit the policyholder if implemented. The amount of investment that the policyholder makes should be invested in the market and help in building a corpus and not get deducted for mortality charges,” says Santosh Agarwal, associate director, and cluster head- life insurance, Policybazaar.com. Higher the assured death benefit, higher is the mortality charge.

Guaranteed surrender value
The new norms say that non-linked policies will acquire guaranteed surrender value after two years. Currently it is three consecutive years. For traditional products, particularly for longer payment term policies, a surrender value will now be available to customers earlier during the policy, notes Anuj Mathur, MD & CEO, Canara HSBC Oriental Bank of Commerce Life Insurance.

“Earlier, because of non-payment of premium, if a customer wanted to surrender within three years of the policy inception, she/he was getting no guaranteed surrender value. At least now the customer will get some guaranteed surrender value if policy is surrendered after two instead of three years of policy inception,” argues Anand Prabhudesai, co-founder, Turtlemint.

Pension product commutation
For pension products, it has been proposed that customers must be allowed to withdraw up to 60% of the policy sum assured, while those with market-linked pension products can partially withdraw their corpus. Presently, under any specified pension product, policyholders are allowed to withdraw only 1/3rd of the total amount as lumpsum, while 2/3rd of the amount is automatically annuitised.

“Now, you will be allowed to withdraw 60% of the amount which brings it at par with National Pension System. Under market-linked pension products, allowing customers to withdraw a sum at specified intervals within the policy term also offers flexibility,” says Agarwal.

The suggestions put forth for pension products, including removal of minimum vesting and 60% commutation, will further help customers invest better towards creating their retirement corpus, says Saisrinivas Dhulipala, appointed actuary, Bajaj Allianz Life Insurance.

Revival period
It has also been proposed that the revival period be extended to five years from the current two years in respect of non-linked products. For instance, if you hold a policy for 15 years and you have paid the premium for just five years, you were earlier allowed to reinstate the policy up to two years (from the last premium paid) by paying the premium along with a specified rate of interest.

The proposed five-years window for reviving a policy will help to reduce the lapse percentage ratio, which is good for both insurance companies and consumers to reinstate the policy and continue the protection and benefit of the said product, says Prabhudesai.

Settlement option period
The proposed norms say that the settlement option period be extended till 10 years or original policy term, whichever is lower. Under a settlement option, the maturity amount entitled to a life insurance policyholder is paid in structured periodic installments.

Subhendu Bal, appointed actuary, SBI Life Insurance explains that at present the period of settlement is usually not extended beyond a period of five years from the date of maturity. For Unit Linked Insurance Products (Ulips), the settlement option provides periodical payments to avoid the possibility of market fluctuations affecting the maturity value at the time of maturity.

Under the proposed change, the time period will provide additional flexibility to the policyholder to stay invested for longer, facilitate systematic withdrawal of corpus and also take care of cash flow needs for a longer duration, such as post-retirement income, recurring medical expenses, school fees for children, etc, says Bal.
Also, the Irdai draft says that switches will be allowed during the settlement period, which is not allowed at present. “This was preventing the customer from switching the money even if there was investment risk. The proposed norm will allow the customer to manage market volatility by switching the fund value during the settlement period,” points out Bal.

Variable products
The category of linked variable insurance products may be removed as linked product structure addresses the requirements in a better manner. The provisions relating to non-linked variable insurance products are also proposed to be simplified.

New design freedom
It has been proposed to relax minimum policy terms for individual and group terms insurance products. It has also been proposed to cap premium allocation charges for Ulips at 12.5%.

Source: DNA Money