| New products will reduce commission payouts and increase the surrender value. nisant patnayak
With less than a week left for the implementation of new product guidelines which comes into effect from October 1, 2013, the insurance companies are queuing up with IRDA to seek approval of newly designed products. Earlier this year, on February 16, IRDA had issued notifications pertaining to the structure of non-linked insurance products like traditional policies, linked insurance policies like ULIPS, variable insurance plans and health insurance policies. There is no clarity whether the new products will supersede the existing policies or not.
Here are some basic features of the linked, non-linked and health insurance products which are likely to hit the market from October.
Minimum sum assured: Minimum sum assured or the death benefit on a life insurance policy or non-linked products will not be less than 10 times or 105% of all premiums paid whichever is higher for individuals below 45 years of age. While for age group of 45 years and above, the minimum sum assured would be seven times of the annual premium or 105% of the total premium paid as on date of death. At present, the insurance companies provide 7-8 times of annual premium depending on age of customers or the plan.
Similarly, for linked products, the minimum sum assured will be 10 times of annual premium or as per a formula prescribed by IRDA for individuals less than 45 years of age and 7 times of annual premium or as per the IRDA formula for individual of 45 years and above. In case of health insurance products, it would be 5 times of annual premium or Rs 1 lakh per annum whichever is higher for both age groups.
Surrender value: Surrender value is the money which a policyholder receives after he/she decides to terminate the policy before its maturity. The new guideline has proposed to hike the surrender value.
For traditional plans, the insurers have to offer a guaranteed surrender value after three years with a premium paying term of 10 years or more. Similarly, for less than 10 years, the guaranteed surrender value would accrue after the second year. This guaranteed surrender value will be 30% of total premium paid if the policy is surrendered between the second and third year. However, it will become 50% between the fourth and the seventh year.
At present, insurance companies offer a surrender value of 30% on all premiums paid minus the first year premium and the policyholders can claim surrender value only if they have paid premiums for at least three years.
Commission Structure: Since IRDA has linked commissions with the period of premium payment, the commissions of agents and brokers on sales of insurance products has been reduced. In single premium non-pension products, the agents will only receive commission up to 2% of the premium paid. In regular premium paying schemes like endowment policies of five years, the insurers will remunerate up to 15% of the first year premium followed by 7.5% in second year and 5% thereafter.
For those insurance products where premium payment tenure is longer like whole life insurance policies, the agents will get commissions up to 35% (if company is 10 years old or above) and 40% (company with less than 10 years of track record) of the first year premium, 7.5 % in second year and 5% till the premium paid by the policyholders.
No commissions will be paid in direct sale of products like term insurance and the accrued benefits will be passed on to the policyholders.
More transparent: The new product guidelines ensure greater transparency as the insurance regulator has asked all insurers to clearly indicate whether the product is protection-oriented, savings-focused or a combination of both. In ULIP products, the life insurers will have to provide performance sheet to policyholders on monthly basis. Besides, the insurers have to disclose the charges, deducted taxes, payment details and other necessary information to their customers by issuing an annual certificate.
In the next article we will discuss the impact of the new guidelines on products.
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