The Insurance Regulatory and Development Authority of India (IRDAI) has recently approved new rules and regulations for life insurance policies that are set to benefit the buyers substantially. Let’s take a deeper look into the key life insurance policy changes that IRDAI has made in the interest of policyholders, covering endowment, pension, unit-linked insurance plans (ULIPs) and term plans.
1. Non-linked policies to attain guaranteed surrender value after 2 years
Existing status: To acquire guaranteed surrender value, the policyholder is required to hold the policy for 3 consecutive years.
Impact of Change on buyers: Now that the minimum term for acquiring surrender value in traditional plans has been reduced by a year’s time, policyholders will be able to withdraw the amount after two years. So, if the premium has been paid of two consecutive years, the policy will get a guaranteed surrender value. Buyers won’t be paying huge surrender costs if they plan to get rid of the policy.
2. Revival period for non-linked polices extended to 5 years and for ULIPs it will be 3 years
Existing status: The revival period for ULIPs is two years and for the non-linked plans, the revival period is 2 years.
Impact of Change on buyers: If the life insurance policy lapses due to any financial difficulty, the policyholder now has far more time to reinstate and revive the policy.
3. For Pension policyholders, commutation of up to 60% will be allowed
Existing Status: Currently if you consider taking other pension products, two-third of the amount is mandatorily annuitized, and you can withdraw only one-third as a lumpsum amount.
Impact of change on buyers: Now that the maximum withdrawal allowed at maturity under pension plans has been increased to 60%, it will to some extent make it at par with NPS. However, in pension plans only one third is tax-free even though 60% withdrawal is allowed unlike NPS where the entire 60% withdrawal allowed at maturity is tax free.
4. Policyholder will have choice to buy annuities from any insurer
Existing Status: A policyholder currently has no choice but to buy annuities at maturity from the insurer who has issued the policy regardless of the rate of interest that is being offered.
Impact of change on buyers: With the liberalization of annuity purchase, policyholders can now shop to get better annuity rates. The open market scenario will create a competition amongst the insurers, compelling them to provide better rate of interest.
5. Minimum life cover benefit will be 7 times for regular premium products across all ages
Existing Status: Presently, for policyholder less than 45 years of age the total limit of life cover is 10 times the annual income and for more than 45 years, the total limit of life cover is 7 times the annual income to avail tax benefits under section 80C of IT act.
Impact of change on buyers: Lower life covers indicate lower mortality charges which means a higher proportion of the policyholder’s premium will go in investments. However, tax breaks under 10(10D) will not be applicable.
6. There Is Flexibility to reduce premium by 50%
Existing Status: A policyholder currently has no flexibility.
Impact of change on buyers: After the payment of premiums for first five years upfront, policyholders have an option to decrease their premium by a maximum of 50%. So, if a policyholder has a financial crunch, instead of policy lapsation he/she can avail the option of reducing their policy premium by 50%.
7. For unit-linked products, the settlement option will be 10 years
Existing Status: Currently, the period of settlement for making installment is 5 years.
Impact of change on buyers: The extended period of the settlement will give policyholders additional number of years to settle installments in case of any misfortune and/or mishap. This in turn will help the policyholders in handling their finance over a longer period.