IRDA’s new product guidelines aim to make insurance policies more customer-friendly and easy to understand. All life products will offer higher life insurance cover and death benefits. Though the commission payouts for distributors have been reduced, the newly designed products will help them to grow their business since the new insurance policies aim to attract new customers through improved disclosures and better surrender values.
Here is the impact on insurance policies after implementation of new product guidelines:
Linked insurance products
ULIPs: The life insurance companies will have to inform their policyholders about the reduction in yield of their investments in ULIPs on a monthly basis. Reduction in yield is the amount which an insurance company charges from the policyholders and it is expected to reduce with the number of years or term. Typically, it can be calculated as the difference between gross yield and net yield. The net yield will be arrived at after deducting all prescribed charges from the gross yield. Also, the insurers will have to issue an annual certificate to policyholders indicating charges and taxes deducted from their ULIPs.
VLIPs:Now, the insurers should have to guarantee a non-negative rate of returns or minimum floor rate while selling variable linked insurance products (VLIPs) to policyholders. The floor rate will be arrived at on the basis of approved index or benchmark.
One of the unique features in the new productsis the facility of portability. Policyholders can shift their ULIPs from one insurance company to another. Also, insurance companies can move towards the evaluation of their respective linked products by an independent rating agency in order to provide qualitative information to the policyholders. The ratings should be done on the basis of fund management quality, level of comfort on operational practices and organizational strength of life insurance companies.
Non-linked insurance products or traditional plans:
New product guidelines aim to position life insurance policies as savings instruments. Similar to the previous structure, the traditional plans have been divided into two categories - participating and non-participating product. Under the existing structure, in participating products, insurance companies have a discretionary power to declare bonus on later date whereas in non-participating plans the bonuses are clearly defined.
Now, in participating products, the bonus once declared becomes a guarantee. It is usually paid in case of death of the policyholder or maturity benefit. This accrued bonus is known as reversionary bonus. In non-participating policies, the insurers should have to disclose the benefits on the policy at the beginning.
IRDA has also increased the death benefits on traditional policies in order to attract new customers.
Health insurance:
Under the new product guidelines, the insurance regulator has extended the entry age - up to 65 years - for buying a new health insurance policy. IRDA has also notified that the health insurance policies can be renewed for lifetime except for customized policies once the contract is signed. Now, the insurance companies will have to settle their claims within 30 days after receipt of documents.
IRDA has also introduced a free-look period of 15 days in health insurance products. Free-look period is the period where policyholders can terminate their insurance contract without paying any charges as penalty to their insurers.
Policyholders who renew their health insurance policies without any claims in the preceding year would be benefited with the bonus. The bonus would be given in form of discount of up to 5% on next premium payment. If no claims will be made for 10 consecutive years, the discount can go up to 50%.
Advisers view
Nisreen Mamaji of Moneyworks Financial Advisors believes that the new products will increase the credibility of insurance companies since they ensure improved disclosures and better surrender values. “Advisers should not take a short sighted view on the reduction in commission payouts as the new products have a capacity to attract new customers,” says Mamaji.
Ritesh Sheth of Tejas Consultancy doubts the willingness of distributors to sell these new products. “Since the commission payout would decline under new product guidelines, distributors need some time to adjust with it. Insurance companies should train them so that they can better understand the benefits of new products and convey this to their customers.”
However,
some advisers are skeptical about the implementation of new products
guidelines. Prakash Praharaj of Max Secure Financial Planners says that the new
guidelines may cost policyholders more.