Your life insurance policy may become more flexible

The Insurance Regulatory and Development Authority of India (Irdai) has recently come out with proposed changes in the form of Irdai (Linked Insurance Products) Regulations, 2018 and Irdai (Non-Linked Insurance Products) Regulations, 2018. These changes, if implemented, would mark a key transformation in how life insurance products impact policyholders.

The proposed norms stipulate minimum death benefit for regular premium plans, guaranteed surrender value, partial withdrawal for linked pension products, amongst a raft of others. DNA Money spoke with insurance experts to decode the changes for you and bring out how they impact insurance consumers. Read on.

Minimum death benefit

It has been proposed that the minimum death benefit would be seven times for regular premium products and 1.25 times for single premium products for all ages. Currently, for a person below 45 years, the minimum death benefit is 10 times the annual income. For those who are in the age bracket of above 45, the same is seven times the annual salary for them to be eligible under Section 80C to avail tax benefits.

"This will benefit the policyholder if lowered to seven times their annual income. The amount of investment that the policyholder makes should be invested in the market and help in building a corpus and not get deducted for mortality charges," says Santosh Agarwal, associate director, and cluster head- life insurance, Policybazaar.com. The higher the assured death benefit, the higher is the mortality charge.

Guaranteed surrender value

The new norms say that non-linked policies will acquire guaranteed surrender value after two years. The current status for the same is three consecutive years. For traditional products, particularly for longer payment term policies, a surrender value will now be available to customers earlier during the policy, notes Anuj Mathur, MD & CEO, Canara HSBC Oriental Bank of Commerce Life Insurance.

"Earlier, because of non-payment of premium, if a customer wanted to surrender within three years of the policy inception, she/he was getting no guaranteed surrender value. At least now the customer will get some guaranteed surrender value if she/he surrenders after two instead of three years of policy inception," argues Anand Prabhudesai, co-founder, Turtlemint.

Pension product commutation

For pension products, it has been proposed that customers must be allowed to withdraw up to 60% of the policy sum assured, while those with market-linked pension products can partially withdraw their corpus. Presently, under any specified pension product, you as a policyholder are allowed to withdraw only 1/3rd of the total amount as lumpsum, while 2/3rd of the amount is automatically annuitised.

"Now, you will be allowed to withdraw 60% of the amount which brings it at par with National Pension System. Under market-linked pension products, allowing customers to withdraw a sum at specified intervals within the policy term also offers flexibility," says Agarwal.

The suggestions put forth for pension products, including removal of minimum vesting and 60% commutation will further help customers invest better towards creating their retirement corpus, feels Saisrinivas Dhulipala, appointed actuary, Bajaj Allianz Life Insurance.

Revival period

It has also been proposed that the revival period be extended to five years from the current two years in respect of non-linked products. Currently, the revival period in respect of non-liked products is two years. In case you wished to reinvest and continue with the same policy, it was just allowed for two consecutive years.

For instance, if you hold a policy for 15 years and you have paid the premium for just five years, you were earlier allowed to reinstate the policy up to two years (from the last premium paid) by paying the premium along with a specified rate of interest.

The five years proposed window for reviving a policy will help to reduce the lapse percentage ratio, which is good for both insurance companies and consumers to reinstate the policy and continue the protection and benefit of the said product, says Prabhudesai.

Settlement option period

The proposed norms say that the settlement option period be extended till 10 years or original policy term, whichever is lower. Under a settlement option, the maturity amount entitled to a life insurance policyholder is paid in structured periodic installments.

Subhendu Bal, appointed actuary, SBI Life Insurance explains that at present the period of settlement is usually not extended beyond a period of five years from the date of maturity. For Unit Linked Insurance Products (Ulips), the settlement option provides periodical payments to avoid the possibility of market fluctuations affecting the maturity value at the time of maturity.

Under the proposed change, the time period will provide additional flexibility to the policyholder to stay invested for longer, as well as facilitating systematic withdrawal of corpus and also take care of cash flow needs for a longer duration, such as post-retirement income, recurring medical expenses, school fees for children, etc, which last for a longer duration, says Bal.

Also, the Irdai draft says that switches will now be allowed during the settlement period, which is not allowed at present. The customer does not have the right to switch between funds.

"This was preventing the customer from switching the money even if there was investment risk. The proposed norm will allow the customer to manage market volatility by switching the fund value during the settlement period," points out Bal.

Variable products

The category of linked variable insurance products may be removed as linked product structure addresses the requirements in a better manner. "The new guidelines on variable insurance plans are now more transparent and flexible giving an opportunity for customers to further invest towards their goals with these insurance plans," says Dhulipala.

The provisions relating to non-linked variable insurance products are also proposed to be simplified. "The regulator has provided clarity on product structures and simplified some categories such as variable products - hopefully, these would spur innovation in the industry and provide customers more choices and unique benefits that can be more closely aligned to the needs of our diverse population," feels Mathur.

New design freedom

Insurers may be allowed to design individual term, group term and credit, and micro insurance products which offer a range of policy terms. At present, the minimum policy term for individual products was at least five years and except for one-year renewable group products, all single premium group credit, and group term insurance products, the policy term was not to be less than 2 years. The customer who would like to go protection cover for a shorter duration (less than five years in case of individual and less than two years in case of single premium) was not allowed due to the minimum policy condition. So, the short-term requirement for protection cover was not fulfilled.

"Now, the insurance company can now offer term products with a policy term of fewer than five years, which will fulfill the short-term need of the customers. The shorter policy term will help to boost the micro-insurance and short-term credit cover. Corporate clients may have group term cover for more than one year as against the current status of each year renewable products, which may help the corporate customer to have a long-term cover," says Bal.

Separately, the Irdai exposure draft has talked about premium allocation charges for Ulips to be now capped to 12.5%, further making the product attractive for customers.

CUSTOMERS TO GAIN

• Surrender value to be applicable after two years instead of three
   
• Proposal to relax withdrawal rules for pension products will help customers plan retirement better 
   
• Revival period for non-linked products to be extended to five years