Monday, December 16, 2013

SECRETS REVEALED……Proposed changes in Insurance, No agent will tell you now

Traditional insurance products are set for a makeover from October. While there are some positives with new regulations, insurance agents are mis-selling existing products as a limited time opportunity. LIC agents have an additional incentive of service tax levy to push products before the deadline.

After basic clarity on why to buy Insurance, as promised I hereby present changes which are proposed to be coming since most of existing plans will close. The Insurance Regulatory and Development Authority (IRDA) has agreed to extend the deadline of new product regulations for the life insurance industry to 1 January from 1 October.

IRDA’s new products guidelines—namely linked insurance products regulations and non-linked insurance products regulations—aim to make insurance policies friendlier for customers. However, insurers will have to discontinue highest net asset value guaranteed products and index-linked insurance plans from 1 October. There is no extension of deadline on these products. “As insurers begin to re-file their products and get approval, they will have to start pulling out the existing plans,” said Chowdhury, from IRDA. Although the wait has become longer, the new regulations could make insurance plans more favourable to customers. You need to understand the benefits the new product guideline will bring. Meanwhile, I hereby present actual gazette copy issued by IRDA / Ministry of Finance.(

After the new guidelines are applicable following changes will be seen--

Product classification
The new guidelines have drawn three broad categories: traditional insurance plans, variable insurance plans (VIPs) and unit-linked insurance plans (Ulips).

Traditional plans: These are opaque products and can be divided into pure insurance and insurance-cum-investment products. The current regulations haven’t tinkered with their design.
Variable plansAccording to the guidelines, VIPs will guarantee a certain minimum rate of return, also called the floor rate, at the beginning. Additional benefits could either be pegged to an index, declared upfront, or come in the form of periodic bonuses which will be guaranteed once declared. Like Ulips, VIPs will have to conform to cost caps
UlipsNew rules don’t change Ulips much as most of the changes took place in 2010. Ulips will have to conform to cost caps by observing the maximum reduction in yield. If the limit is breached, the insurer will have to plough back the extra cost.


Minimum cover
IRDA has mandated that the minimum sum assured or death benefit on a life insurance shall not be less than 10 times the annual premium for individuals below 45 years of age. But for policies with tenors of less than 10 years, the sum assured limit has been reduced to five times the annual premium. That said, at any point the death benefit will have to be at least 105% of all premiums paid till date.
EFFECT: This change will be applicable to all insurance companies. This is positive and will bring clarity and transparency.

Higher surrender value
In case of Ulips and VIPs, the maximum surrender charge will be Rs.6,000 in the first year tapering off to Rs.2,000 in the fourth year and becoming nil fifth year onwards. For traditional plans, the surrender charge is still on the higher side. As per the new rules, you will become eligible for a surrender value after paying premiums for two years in case the premium-paying term is less than 10 years. You become eligible to a surrender value after three years if the premium-paying term is more than 10 years. The minimum guaranteed surrender value will be 30% of all premiums paid going up to 90% of the premiums paid in the last two policy years.
EFFECT: This will be effective for all Insurance companies. This both positive and negative. We need to ask ourselves are we buying or are being sold a policy or plan of Insurance and are we buying to stop in future….If we are buying to stop or surrender in future we need to go back to basics and for that refer to SHORTEST SECRET TO BUYING INSURANCE on 

Service Tax will be added to Basic Premiums and collected
Till now LIC was not charging the service tax of 3% from the customers and was paying it to govt. from the pool of money collected itself, but now the service tax will have to be charged separately from policy holders. Which means that if your LIC premium was Rs 50,000 per annum, now it will be 3.09% higher in first year, which is Rs 51,500 and after 1st year, it will be 1.545% as per industry sources.
Basic Premiums will be equal throughout the period of the policy Service tax will be collected over and above the contractual premium. Now there will be a clear idea about how much you are paying as tax and how much will go towards premium. So this move will actually bring transparency.

EFFECT: While customers see it as additional burden, note that it’s not the case exactly, Earlier – LIC was paying the service tax from the pool of money collected from investors only, which reduced the bonus amount given back to them. But now because it will not be taken out from the funds, that means the bonus declared each year will go up by that much margin and will come back to investors only. Note that Pvt. 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. So it’s a ppositive for LIC loyalists.
Possible Decrease in Premium on LIC Policies-Atleast Mortality rates will be down
There is a great possibility that the premiums on LIC policies will come down by some margin, because the mortality rates will now be revised by LIC in calculating the premiums. Your premiums may come down drastically as from new period onward new mortality table will be referred to fix insurance premium.  Especially LIC which is using the 1994-96 Ultimate Mortality Rates will move to IRDA’s Indian Assured Lives Mortality (2006-08)

Mortality rates are the rates at which the insurance company deducts the fees for insuring you based on your age.
EFFECT: LIC had been using old mortality rates till now, but now they will have to use new mortality rates. Lets not go into detailed calculation at the moment, but your risk premium part should go down by approximately 10% (not the full premium, because only some part of whole premium in traditional policies are risk premium and rest is investment part) .
As of Private companies, they are well updated to mortality tables,so no much diiference in premium rates is expected.
Agents’ incentives have now been linked to the premium paying term
Now agents commissions is linked to the premium paying tenure. Earlier a lot of agents used to sell the policies which had higher maturity tenure, but limited premium paying tenure (like 30 yrs policy with 10 yrs premium payment) .
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. Products with PPT of 12 years or more will have first year commissions up to 35% in case the company has completed 10 years of existence and 40% for the company in business for less than 10 years.
EFFECT: This is Positive, as the cost may be less and so investible surplus may increase finally increasing returns for the policy holder. Also this will bring more transparency.
The funny aspect is that a lot of LIC agents tried to mislead many new investors by projecting date Jan 1, as the deadline when a lot of LIC products will stop giving good features using the official notification.
Non-Linked/Traditional Plans
1.      One can pay their premium only 30 days before the date of premium due. So policy holders who are paying premiums in advance before January in any avail TDS Benefit and after producing Advance premiums paid receipts, henceforth will have to claim TDS Paid in Subsequent F.Y.
  1. Policies sold during the transition period (from 20th Feb 2013 to 1st Oct 2013 and may be till 31st December, 2013) will have the option either to have continued their policies with existing features or move to new features (Applicable from 1st January,2014 or from date of Launch-as the case may be).
3.      Benefit illustration like guaranteed and non-guaranteed at gross investment returns of 4% and 8% respectively signed by both prospective policyholder and agent. It must form the part of the policy document

Linked Plans-
1.      Death Benefit will be either of below. A)  The Sum Assured as agreed in the policy plus the balance unit of fund. B)  Higher of Sum Assured or balance unit of a fund.
2.      But the minimum maturity value should be equal to the value of units available on maturity date.
3.      In case of death within 12 months of the start of the policy or from the date of revival of the policy then nominee will be entitled for fund value available on the date of death.
4.      For policies issued for minors the date of commencement of policy and risk commencement will be same.
5.      Minimum policy term will be 5 years and premium payment will be 5 years.
6.      Lock in period will be 5 years.
7.      Partial withdrawal will be available after 5 years only. But for child policies one cannot withdraw until minor insured attained the age of 18 years.
8.      Loan will not be available under linked products.
9.      Same day NAV will be applicable if the premium received or redemption request received within 3 P.M. Else next day NAV will be applicable.
10.  Yearly statement will be sent showing the charges and the current fund values.

These are the major points which one must know. The list is big to go by, but I mentioned the major changes one must know.More detailed list can be read on and /or /  (as all listed here are not my rules, I need to give credit to these sites) 
According to one ethical LIC agent, “There is confusion among agents and hence the strategy is to go for the kill as they are unsure about their effectiveness to sell new traditional products next month. Moreover, we don’t know about the new products LIC has lined-up. But, if I hard-sell to my customers today, then how do I sell them products next month?”
What should you do?
The insurers have to refile all their products to IRDA and already lots of products have been approved and many are still waiting for approvals. So if you have a insurance policy then you will get the communication from your insurer about any changes if any. Right now, for sure the traditional plans have got better, compared to their past avatars.
If you are adamant on buying endowment plan, better wait for some time and let things get more clear, and even if you have already bought you have an option, right?
SURELY REFER TO MY EARLIER ARTICLE ON - SHORTEST SECRET TO BUYING INSURANCE & one can get better insight on basics of what and why to do, on insurance…

 What do you think about this change? Let me know through your comments……


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