Traditional insurance plans: Can new rules get transparency
In a recent inauguration ceremony of an insurance brand, finance minister had appealed insurers to come up with simple products and refrain from mis-selling. In his opinion, the reason behind poor growth in insurance sector over last few years has mainly been complex product structures and unrestrained mis-selling.
Ever since Insurance Regulatory and Development Authority (IRDA) issued guidelines governing Unit Linked Insurance Plans (ULIPs) in July 2010; insurance brokers and agents have been pushing hard the traditional plans. Traditional plan were not regulated so far.
However, to make traditional plans more transparent and attractive to investors, IRDA has recently issued guidelines for traditional life insurance products.
By issuing new rules, the regulator has endeavoured to put an upper limit on,
- Commissions paid to agents and brokers
- Surrender charges and related expenses
It has also tweaked some other provisions such as
- Provisions pertaining to minimum sum assured
- Indicative returns
- Minimum Premium paying term
Once the new guidelines become applicable, the maximum commission that can be paid by insurance companies with existence of more than 10 years in business to institutional brokers such as banks would come down from 40 percent to 35 percent. However, companies with less than 10 years of existence in business can pay 40 percent commissions to individuals but they too will have to adhere with the cap of 35 percent while paying commission to institutional brokers. Moreover, the minimum premium paying term has been fixed as 5 years. The plans with minimum premium paying term of less than 5 years will be forced to be withdrawn. The new guidelines also classify non-participating index linked insurance policies as ULIPs and not as traditional plans. Non-participating policies are those which do not share profits of the insurance company. To protect the interest of policyholders, the regulator has imposed a condition on insurers to provide guaranteed surrender value.
Guaranteed Surrender Value: What you will get?
|Year||Guaranteed Surrender value|
|2||30% of the premium paid|
|3||30% of the premium paid|
|4||50% of the premium paid|
|5||50% of the premium paid|
|6||50% of the premium paid|
|7||50% of the premium paid|
Moreover, IRDA has directed insurance companies to explicitly mention the expected rate of return in the policy documents.
In our view, the new guidelines is a welcome move which will curb mis-selling to an extent but still the commissions are high enough for someone who wants to mis-sell. Besides, insurance companies with less than 10 years of business history can still offer commissions as per the existing structure to individual agents. This makes the provisions weaker as many insurance players are yet to complete 10 years of their business operations. New guidelines appear unattractive for those who want to hold traditional plans till maturity. This is for the fact that, apart from moderate cost reductions, new rules have little to offer to boost returns of policyholders. Traditional plans are still not as transparent as ULIPs. We think while buying insurance you need to look at indemnifying risk to life. From the cost-benefit point of view term plan is the best option.
PersonalFN is a Mumbai based Financial Planning and Mutual Fund Research Firm