Some of the most widely sold life insurance policies especially traditional policies like Endowment Plans, money back plans and even ULIP’s will to discontinue after 31st December in this year. IRDA’s new product guidelines have already laid down some major changes in life insurance industry and will becom e effective from Jan, 1 2014 which aims to make insurance policies more customer-friendly and easy to understand. However, agents have effectively used these half-truths to make people rush to buy insurance before the guidelines come into force. They are pushing the existing plans by giving the false impression that customers could miss out on a great investment opportunity.

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But truth lays here that onward Jan1, 2014; all life products will offer higher life insurance cover and death benefits, they will be replaced by better, more customer-friendly plans. Contrary to what agent claim, Irda’s new guidelines for traditional plans have not only enhanced the surrender value of a policy, but also lay stress on longer terms and higher covers. The premiums could go down because the Life Insurance Corporation (LIC) will use revised mortality rates to assess the risk.

Higher Surrender Value

The new guidelines have come with some respite with higher of surrender value for policyholders. Till now, if you opted to cancel or surrender a policy prematurely, the surrender value was calculated @ 30% of the total premium paid excluding the first year’s premium irrespective of any term of the policy. Now the rule of surrender value will depend on the premium paying term of the policy.  The new rule says that the surrender value must be at least 30% of the premium including the first premium.

If the premium paying term for policy is less than 10 yrs, then the policy will acquire the surrender value after paying premium for 2 yrs (earlier it was 3 yrs), however if the premium paying tenure is more than 10 yrs , then the surrender value will be acquired only after paying 3 yrs premium. From the fourth to seventh year, the minimum surrender value would be 50% of the premium paid, and has to reach 90% of premiums paid in last 2 years of policy paying tenure.

Higher Insurance Cover

The new regulations also lay stress on higher insurance cover. If the policyholder is up to 45 years old, the insurance cover must be at least 10 times the annual premium. For those who are above 45, the cover can be up to 7 times the annual premium. However, the tax rules say that if the cover is less than 10 times the annual premium, the policy will not be eligible for tax benefits under section 80C and Section 10(10d). Here, IRDA new rule conflicts with the new provision of Income tax Act.

Lower Commissions for Agents

The commission earning agents will now be linked to premium paying term of the policy. In case of regular premium insurance policies, a policy with a premium paying term (PPT) of five years will not pay more than 15% in the first year. A policy with an 8-year premium paying term will give 24% in commission in the first year as compared with 35% under the existing structure. Even a 10- year premium paying term will give 30% commission to the agents and only if the term is 12 years or more will he get 35%.

Lower premium of LIC

The basic term cover of LIC is almost 70-80% costlier than the cheapest cover offered by private insurers. This is because the public-sector company still assesses the risk based on the mortality tables of 1994-96. However, if life expectancy has improved from around 58.2 years in 1990 to 66.5 years in 2010. From 1 January, 2014, LIC will go by the IRDA’s table based on 2006-08 mortality rates. It could bring down the premiums.

Service Tax charged in LIC Policy Premium

Service tax is already payable on life insurance policies and private insurers are charging customers accordingly. But till now LIC has not been charging the service tax of 3% from their customers and paying the service tax from the pool of money collected from investor only, which reduces the bonus amount given back to them. But now the service tax will have to be charged separately from policy holders that mean the bonus declared each year will go up by that much margin and will come back to investors only. So, it’s a zero sum game. Note that private companies were charging the service tax already, so nothing changes on their side. Only LIC was not charging it separately, which they will have to do from Jan 1, 2014 deadline.

In order to push sales, a lot of LIC agents are issuing misleading advertisements saying that insurance companies are discontinuing their policies by 31st December and those new policies would come with fewer benefits and more expensive. So we will advise that don’t fall into the insurance trap and better wait for some time and let things get clearer.

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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