There is a famous saying “Change is the essence of life”. Stagnate and perish. Just like other things in life, insurance too goes through reforms and changes. Gold is tested in the fiery furnace and comes out a refined product .Life insurance products are tested in the fiery furnace of reforms and come out better more holistic products. One may fear change but change is necessary for the evolution of life and there is no doubt that reforms address the shortcomings of life insurance policies.
An increase in surrender value for traditional life insurance policy
- Traditional Life Insurance plans become eligible for a guaranteed surrender value after one pays premiums for three years provided the premium paying tenure is more than 10 years. Earlier one could surrender his traditional life endowment policy after paying the premium for three years and get 30% of the premiums paid minus the first year’s premium as a guaranteed surrender value. The new reforms state that the first year’s premium will not be deducted and one would get 30% of all the three premiums paid on surrender of the policy after deducting any surrender benefits which have already been paid.
- If one takes up a traditional life insurance policy whose premium paying term is less than 10 years one obtains a surrender value after paying premiums for two years instead of for three years prior to the reform.
- If one surrenders the life insurance policy in the fourth or the fifth year he gets 50% of all the premiums paid minus any survival benefits already paid out. If one surrenders the policy in the sixth or the seventh year or in the last 2 years of the policy paying period 90% of all the premiums paid are returned minus any survival benefits paid.
A Higher Death Benefit
- If one purchases traditional life insurance plans and one is below 45 years of age then the minimum sum assured also called the death benefit should not be less than 10 times the annual premium one pays if one’s policy has a maturity period of over 10 years.
- If one purchases a traditional insurance life policy with a maturity period below 10 years the death benefit or the sum assured should be at least 5 times the annual premium.
- If one purchases a traditional life endowment plan and one is above 45 years of age then the minimum sum assured also called the death benefit should not be less than 7 times the annual premium one pays if one’s policy has a maturity period of over 10 years.
- One gets a minimum death cover of at least 105% of all the premiums paid till date at any point in time.
- If one opts for a traditional life insurance policy paying a single premium and one is less than 45 years of age the sum assured or death benefits are at least 125% of the premium. If one is more than 45 years of age the sum assured or death benefits are at least 110% of the premium.
- If one has to claim tax benefits for his traditional endowment policy the sum assured needs to be at least 10 times the base annual premium.
- One might have to pay a higher premium as he now gets a higher cover.
Change in the Agents commission structure
- As per current rules an agent draws the same commission for selling a traditional life endowment policy irrespective of the term or maturity of the traditional policy he sells.
- The agent draws the same commission for a five year, ten year or a fifteen year maturity policy. The new rules state the agents get their commissions linked to the premium paying term.
- If one opts for a regular premium paying term in the traditional life endowment plan with a premium paying term of 5 years the commissions are capped at 15% for the first year.
- If one opts for a regular premium paying term in the traditional life endowment plan with a premium paying term of 12 years or more the first year’s commission is capped at 35% provided the insurance Company has been in business for at least 10 years. If the insurance Company has not completed 10 years in business then the first years commission is capped at 40%.
Transparency in returns
- Insurance agents promised the moon to traditional life insurance policy buyers prior to reforms in the traditional life insurance sector .One’s insurance agent now shows him a customized benefit illustration on guaranteed and non guaranteed benefits of the traditional life insurance policy with a gross investment return of 4% and 8% respectively. One and his agent both sign the benefit illustration and this serves as a contract or agreement between one and his agent. One comes to know returns obtained in each year of the policy and not just at the maturity of the policy.
One remembers Charles Darwin and the survival of the fittest theory. In order for a life insurance product to survive and thrive it has to be the fittest around and reforms help life insurance products evolve. Clearly reforms would do a lot of good to traditional life insurance products.