IRDA's new guidelines ensure that 'Customer is king'

Avinash Iyermoneycontrol.com

As an insurance policyholder, have you ever worried about:

-- The returns your policy will fetch you-- Being fleeced in the name of agent commission-- Losing out a lot of money in case of exiting a policy before it matures

If yes, you're not alone. Besides, these are just some of the thoughts that keep playing in the minds of policyholders. For the layman, insurance can prove to be a domain riddled with confusion and unanswered queries. But all this will now be a thing of the past. Insurance Regulatory Development Authority (IRDA) has drafted guidelines that are customer-centric and more transparent.

Insurance products will now come with features that have more clarity and are aimed solely at protecting the consumers' interests.

If the IRDA gazette released in February last year is anything to go by, 2014 could well be the year when policyholders start enjoying more benefits than before. The changes notified by IRDA have taken effect from January 1 this year and will give a makeover to the existing products and added benefits to the consumer.

These reforms by the insurance regulator are customer-driven and promise benefits in the form of more bonuses and better surrender values. They are aimed at making the insurance industry more long-term focused.

Let us see how these steps taken by IRDA benefit you, the customer:

Focus on the long term

Minimum premium paying term of non-linked variable insurance products has been set at five years. This is to make sure that insurance products are of longer duration and customers look at it from a long-term perspective.

Capital guarantee and more bonuses

Variable insurance plans now guarantee certain minimum rate of return at the very beginning when the customer opts for such policies.

This will help you decide at the very onset if the policy is best suited for your needs or not. If you don't find the returns lucrative, you might as well opt for a product that suits your needs. While eliminating the element of uncertainty, it offers the customer capital guarantee. Also, there could be other benefits pegged to an index, declared upfront or in the form of periodic bonuses, which certainly spell good news for policyholders.

More clarity

Variable plans now conform to cost ceilings. As of now, this is mandatory only for (unit-linked insurance plans) ULIPs.  This will give the customer clarity about the benefits he is entitled to through the period of the policy and at maturity as well.

ULIPs will have to observe the reduction in yield (difference between gross and net yields) and inform policyholders of the same on a monthly basis. This will ensure that customers are in constant touch with the policy they have chosen.

The regulator has asked all insurance companies to specify whether the product is protection-oriented, savings-focused or a combination of the two. This way, a customer is clear about what he is getting into rather regretting at a later stage.

As for, traditional insurance plans, there has almost been no change in their structure.

Higher surrender value In case a policyholder is in urgent need of cash, he will now be able to fall back on the surrender value of the policy he is servicing. Surrender value is the amount the policyholder will get from the life insurance company if he decides to exit the policy before maturity.

The regulator has said that in case the premium-paying term of a policy is less than 10 years, the policyholder will become eligible for surrender value after paying premiums for 2 years. And in case the premium-paying term is over 10 years, surrender value can be obtained after paying premiums for 3 years. The minimum guaranteed surrender value will be 30% of all premiums paid going up to 90% of the premiums paid in the last two policy years.

While ideally you should service a policy till it matures, it may not always happen. In the event you wish to opt out midway, you will receive adequate surrender value provided the necessary conditions have been fulfilled. The longer you stay invested, the higher will be your returns.

This move will prove to be an advantage to the consumer, more so in cases of emergency when liquidity is needed.

Death benefit

According to IRDA guidelines, minimum sum assured or death benefit on a life insurance will be 10 times the annual premium for individuals below 45 years of age. For those above the age of 45, the death benefit is 7 times the annual premium. At any point, the death benefit will have to be at least 105% of all premiums paid till date.

Agents' commission

With the new IRDA guidelines in place, the amount that agents get as commission will come down. For a 5-year premium-paying term policy, commission will be 15% in the first year, 7.5% in the second and third and 5% thereafter. For policies that have premium-paying terms of 12 years and above, commissions payable in the first year can go up to 35% if the company is at least 10 years old and 40% in case company is less than 10 years old.

In case you buy the policy online, there will be no commission and this benefit will be passed on to you. With a slew of such policyholder-centric measures, it's clear that IRDA wants insurance companies to woo customers with renewed vigour.