IRDA's changes to traditional plans to be effected from Jan 1, 2014

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Published: Monday, October 7, 2013, 11:16 [IST]
 
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IRDA's changes to traditional plans to be effected from Jan

Traditional plans of insurance industry, including money-back and endowment plans, and even ULIPs would be revamped with effect from January1, 2014. The new norms are aimed at increasing returns, reducing cost and increasing death benefit for policyholders.

Few of the several changes that would be implemented in the life insurance plans beginning new year that you must know as an insurance customer or prospective buyer are :

1. Revised mortality rates by LIC to result in lower policy premiums: The revision of mortality rates, one of the major determinant of policy premium price, by LIC is likely to lower down the premium policy rates. More precisely, risk element of the total premium in conventional insurance plan shall go down by some percentage.

3. Surrender Value or S.V on policies to increase: The terms relating to the surrender value or S.V of an insurance policy that is dependent on premium payment tenure will be changed. In case the premium payment term is over 10 years, the surrender value for the policy can only be obtained after paying premium for minimum 3 years. Policies with premium payment tenure of less than 10 years will now be entitled for surrender after premium payment for 2 years that was earlier 3 years.

As per the new terms, individuals exiting an investment in insurance policies will now receive a minimum of 30% of the premium amount paid including the premium paid during the first year of the policy term (earlier first year policy premium was deducted while calculating S.V when policyholder surrendered the policy after paying premiums for 3 years).

3. Death Benefit to increase: The main objective of insurance will now be well-served with increased protection cover in case of traditional plans. For policyholders aged less than 45 years, the minimum sum assured needs to be 10 times the premium amount paid and for policyholders aged over 45 years it has to be seven times.

4. LIC to charge service tax on policy premiums : Until now, LIC was paying service tax to the government from the funds garnered by the public and not charging separately from policyholders. But as per new norms from January 1st, 2014, LIC would levy service tax on policy premium.

While, LIC customers may perceive the new ruling to impose an additional burden the case is not as though. As the investors' funds that the institution previously used to pay the service tax reduced the bonus amount to the policyholders in the same proportion.

5. Upper limit set for agents' commission : Until now, a sizeable part of the investor's premium amount was going to the agents as commission but with the new ruling the commission amount has been set at maximum 15% for the first year, 7.5% for the second year and 5% thereafter. Also, as per the new norms, for agents to be entitled to commission amount, premium paying tenure for the new policies should be minimum 5 years.

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