News 209 views March 26, 2019

IRDAI Proposes Guidelines in Policyholder Interests

IRDAI reviews current insurance provisions to set insurance products at par with other financial tools and monetary instruments

In a move to regulate the working of the Indian insurance sector and streamline its processes, thus, motivating more people to buy insurance, the Insurance Regulatory Development Authority of India (IRDAI) has proposed changes published as IRDAI (Linked Insurance Products) Regulations, 2018 and IRDAI (Non-Linked Insurance Products) Regulations, 2018. If implemented, policyholders stand to gain immensely from the new version of insurance products modified to ease their lives.

Latest IRDAI Guidelines in PolicyHolder Interest

The newly proposed set of regulations come after a gap of full five years as the insurance products currently sold in the market adhere to the 2013 guidelines that mandated necessary changes in them corresponding to the then customers’ requirements and preferences. Considering that the Indian market is changing at a rapid pace, thus, bringing forth new needs and financial goals of today’s customers, insurance regulators found it imperative to suggest provisions that would fit in the needs of policyholders or prospective insurance customers, while also providing necessary protection at lower costs.

It is important that policyholders or those looking to include insurance as an element of their long-term financial goals take note of the modifications suggested by IRDAI and their prolonged impact on their economic interests. The key changes proposed include:-

Revision Of Minimum Death Benefit

The suggested provisions include revision of minimum death benefit to be seven times of the annual premium amount in regular premium products and not more than 1.25 times for single premium products, unbiased of the age group the insurance customers fall in. The new provisions, if implemented, would be in stark contrast to the current regulations mandating a minimum sum assured amount of 10 times the yearly premium in case of customers aged below 45 years and seven times the annual premium paid for customers above 45 years of age. While the tax implications are yet to be declared, this move would benefit policyholders who instead of focusing only on insurance premium payment for the desired sum assured can divert their investments to the market in building a corpus, and thus, escape the brunt of additional deductions for mortality charges. Aiming for a higher sum assured or greater death benefits means more deductions on mortality charges, which means that lowering the guaranteed minimum amount of death benefits translates to a lesser deduction in mortality charges.

Assured Surrender Value

As per the new provisions, those holding traditional, non-linked insurance policies will be entitled to a guaranteed surrender value after two years of buying them. Currently, the insurance holders are required to wait for three consecutive years. This move would be of effective interest to policyholders, especially, those who had opted for prolonged payment term insurance policies. This provision was suggested by the IRDAI as the current regulations disallow any guaranteed amount of surrender value in the event of policyholders looking to surrender their policies within three years of their inception. The suggested provision, if and when implemented, would allow customers to gain a definite amount of guaranteed surrender value in case they are inclined to surrender their policies after two years of buying their policies.

Revival Period Extended To Five Years Instead Of Two Years

This one provision will not only relieve insurance customers of the compulsion to revive their non-linked policies within the mandated revival span of two years but lessen the chances of policy relapse. The biggest drawback that the policyholders view regarding the currently allowed revival period is that if they wish to reinvest and continue with the same policy, they have only two years to do so. The proposed window for reviving any non-linked policy of five years will not only bring down the lapse percentage ratio, but lend customers an increased time span during which they can revive their policy from the last date of premium paid, and thereby, keep themselves insured.

Commutation Up To 60 percent Allowed In Case Of Pension Products

The current provision allows policyholders to withdraw only one-third of the sum assured as a lump sum, while the rest of the amount is given as fixed payments every year. However, the IRDAI has suggested a provision pursuant to which policyholders, paying for pension products, would be allowed to withdraw up to 60 percent of the total amount of sum assured, thus, bringing non-linked pension products at par with the National Pension System. Those who have bought market-linked pension products are allowed to partially withdraw from the corpus created at specified intervals within the period of the policy, thus, offering them greater flexibility to use the money earned.

Settlement Period Extended

Currently, insurance companies do not allow extension of settlement period beyond a period of five years from the date of maturity. Under the proposed norms, the insurance customers can seek for a longer settlement period extending to 10 years or the original period of the policy, whichever is lower. Opting for a settlement option ensures that the sum assured, in case of death, is paid as structured periodic installments to the nominee. In case of maturity, the same is paid to the insurance policyholder on an installment basis.

Policyholders stand to gain a lot if this suggestion proposed by the IRDAI gets implemented as it inspires the policyholders to stay invested for a longer period for at least up to 10 years. In addition, this provision would facilitate systematic withdrawal of the corpus amount by the policyholder or their nominees, thus, taking care of their financial needs for prolonged periods. Considering that switching of fund options is disallowed during the settlement period, the new provision, if and when implemented, would allow policyholders to switch from one fund to the other, depending on their risk appetite, during the settlement period. Allowing switching of fund options will ensure that the policyholders are able to save their corpus or gain greater returns in accordance with the market movements.