Irdai's regulatory changes likely to make insurance products more appealing

After 2013, the Insurance Regulatory and Development Authority of India (IRDAI) has now once again come out with wide-ranging changes to product regulations. Most of these changes, according to experts, are pro-customer and will enhance the attractiveness of insurance products vis-à-vis those offered by mutual funds, National Pension System (NPS), and so on.

Non-linked or traditional policies  

Surrender value and revival period hiked: IRDAI has reduced the time after which a traditional policy acquires a surrender value. Earlier, if a policy’s premium payment term was 10 years or more, it acquired a surrender value after three premiums had been paid. If the premium payment term was less than 10 years, it acquired a surrender value after two premiums. Now policies will acquire a surrender value after two premiums have been paid.

The regulator has also increased the amount of surrender value payable. Now, the policy will acquire a surrender value of 30 per cent of total premiums paid in the second year, 35 per cent in the third year (up from 30 per cent earlier), and so on. “Customers who exit before maturity will lose out less,” says Santosh Agarwal, head of life insurance, Policybazaar.com.

The period during which traditional policies can be revived has been increased from two to five years. “The enhanced surrender value available and extension of revival period are both enabling provisions that will maximise value to the customer,” says RM Vishakha, MD & CEO, IndiaFirst Life Insurance.

Unit-linked policies

Date for determining fund value altered: Earlier, in case of death from suicide, the fund value paid to the nominee was the one prevailing on the date of death. Now the nominee will receive the fund value as on date of intimation of death from the insurer. Assuming a person passes away on January 1, but the family informs the insurer on May 1, the family will, according to new regulations, receive the fund value as on May 1, along with certain specified charges deducted between the date of death and date of intimation of death that would be returned back with the death benefit. “The new regulations ensure equitable treatment of policyholders and insurers as the death benefit is directly linked to market movement between the date of death and date of intimation of death,” says Aalok Bhan, director, Max Life Insurance.

All charges deducted during the interim period will have to be refunded, barring fund management and guarantee charge.

Switching funds allowed during settlement period: The settlement option refers to the manner in which the customer chooses to receive pay-outs after maturity. If he has 10,000 units, he may choose to receive 2,000 units annually over five years. During this period, only the fund management charge was deducted, and the customer was not allowed to change his fund.

But market conditions can change over such a long period. If a customer believes that the markets are poised for a fall, he may want to exit equities and enter debt. Now, the regulator has allowed fund switches during the settlement period. It has also allowed risk cover of up to 105 per cent of the total premium paid.

Default option changed: After five years, if a customer does not pay the premium, he has the following options: surrender or complete withdrawal, revive it within the revival period, or convert it into reduced paid-up mode. Some customers do not respond to the insurer’s reminders. In such cases, earlier it was deemed that the customer has chosen the complete withdrawal option. So his policy was surrendered and his fund value was paid back to him. The issue with this rule was that some customers may have wanted to stay invested.

 
Under the new rules, if a customer does not respond, it will be deemed that he has chosen the paid-up option, which can be revived within three years. Only if he does not revive the policy within three years will it be treated as surrendered.

Minimum sum assured reduced: Earlier, if a product was being sold to a person aged less than 45, its sum assured had to be at least 10 times the annual premium. If it was being sold to someone aged more than 45, it had to be at least seven times. Now, all regular premium products (linked and non-linked) will need to have a minimum sum assured of seven times the annual premium.

According to income-tax law, the sum assured must be at least 10 times the annual premium for the policy to be eligible for tax benefits. “Not many people may buy a product with a lower sum assured as they would not want to lose out on the tax benefit,” says Kapil Mehta, co-founder and managing director, Secure Now Insurance Broker. Other experts differ. “It’s a positive move for people buying unit-linked insurance plans (Ulips),” says Naval Goel, CEO, PolicyX. Adds Agarwal: “The mortality charge will come down if the cover is lower. A larger part of the premium will get invested, enhancing returns.”  

Pension plans

Commutation amount hiked: The earlier regulations permitted customers to withdraw one-third of the corpus at maturity and buy an annuity (from the same insurer) with two-third. 

Now, customers will be able to withdraw (commute) up to 60 per cent of the corpus, and buy an annuity with the rest. “The commutation amount in insurers’ pension plans will now be at par with NPS,” says Agarwal. Of the 40 per cent to be annuitised, half will have to be used to buy an annuity from the same insurer. The balance can be used to buy an annuity from another player. Greater competition in the annuity space may lead to insurers offering better returns.  

Higher liquidity with partial withdrawals: Until now, partial withdrawals were not permitted in pension products. Now IRDAI has allowed up to three during the policy tenure in unit-linked pension plans. The customer will be allowed to withdraw up to 25 per cent of the fund value each time. The regulator has stipulated certain conditions for allowing partial withdrawals: to purchase or construct a house, for a child’s higher education or marriage, or in case the customer or his spouse contracts a critical illness. These conditions are similar to those prevailing in the Employees Provident Fund and NPS.