Proposed Changes in Traditional Life Insurance Policies
Submitted by gina on Sun, 03/03/2013 - 17:03
Good Old traditional plans which include term plans, endowments, money backs and whole life policies offer fixed income returns in the case of death or maturity, have been a favourite among life insurance companies and their marketing intermediaries, since ULIP got regulated and commissions were slashed to 2% - 5% in 2010.
However, all that is set to change. Insurance Regulatory and Development Authority (IRDA) has issued guidelines with regard to commission payouts, provisions for minimum sum assured and guaranteed surrender values. These guidelines will improve transparency and reduce mis-selling of traditional products.
These new guidelines have increased the minimum premium paying term of the policy to 5 years so that life insurance products are of longer duration. To further protect the interest of the policyholders, the minimum guaranteed surrender value of traditional policies have been kept at 50% of the total premium paid when the policy is surrendered in the second or third year and it progressively increases.
IRDA has shown the red card with regard to the maximum commission that can be paid to the agents. In the first year they will be paid only 15% as compared to rates between 25%- 40% earlier, trail commission of 7.5% in second year and 5% in the third year.
While these moves undoubtedly protects policyholders interest better, the flip side is that with the dip in the commission rates the intermediaries (specially the individual agents) service quality will also see a dip as it is not viable for them to provide service to the clients at the proposed commission rates.
In the move to reduce commissions in traditional plans, individual agents will no longer be interested to sell as they would not be able to survive on the proposed commission rates in the future. This is in-line with what IRDA wants to achieve that insurance is subject matter of solicitation and shouldn’t be sold.
Though immediate outcome of this move would be that the market penetration in rural areas which are serviced mainly by individual agents, would reduce and like many ULIP policies, there would be lot of abandoned policies in traditional plans too. Corporate intermediaries’ like banks with tied clientele would gain from this. Around 14lacs of LIC agents had gone on a one day strike on March 7th to protest against the proposed changes.
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