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Do the Changes in Traditional Life Insurance Make your Life Better or Worse?

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traditional life insuranceYou must have seen the latest ad from a popular life insurance company which talks about changing face of life insurance. That’s exactly what is happening. IRDA has decided to revamp the life insurance space, especially the traditional life insurance policies. The changes have already come into effect from Jan 1, 2014.

Along with traditional plans and Ulips, a new category known as variable insurance has come into play. This new category of products should guarantee a minimum rate of return also known as floor rate. It has to be disclosed at the beginning. The traditional policies will undergo the following changes:

1) Higher death benefit

Death benefits will increase for all traditional policies. For people below 45 years of age, minimum sum assured would be 10 times the annual premium being paid. For people above 45 years of age, death benefit will be at least 7 times the annual premium paid. For single premium plans, this cover would be 125% of premium for age up to 45 years and 110% for those above 45.

How will it affect you?

Higher death benefit would mean that even though you are mis-sold a policy by an agent, it would offer you a minimum and better sum assured than the ones before.

2) Higher Surrender Value

For the policies whose premium payment term is less than 10 years, there will be surrender value if held for at least 2 years instead of 3 years. For policies whose premium payment term (PPT) is more than 10 years, surrender value will apply if policy is in force for at least 3 years.

Minimum guaranteed surrender value will be 30% of premium paid if surrendered by 2nd year (if PPT is less than 10 years) or if surrendered by 3rd year (if PPT is more than 10 years). The minimum surrender value will increase to 50% of premium paid if surrendered between 4th and 7th years. It will be 90% if surrendered in the final two years of the policy.

How will it affect you?

For all the previous traditional policies, the maximum surrender value was only 30% of premium paid irrespective of the number of years of premium paid. There were multiple cases where customers cold neither stay with a policy nor could they exit at a loss. However, the minimum surrender value has now been increased with the increase in number of years of premium payment. It will enable you to exit the policy at a reasonable value if you have stuck to it for few years.

3) Revised Mortality Rates

A new mortality table will be followed by life insurance companies. LIC will also be following this new mortality table.

How will it affect you?

Mortality charges are determined from this mortality table. The revised mortality table will thereby reduce these mortality charges. As a result of reduced charges, the premiums will also decrease. Even a slight decrease in these charges will benefit you in the long term.

4) Service tax on premiums

LIC has begun charging service tax on all its policies. Service tax will be directly collected from the customers’ premium amounts. Previously, they used to pay service tax to the govt. without charging from the customers.

How will it affect you?

Your premiums will jump up as a result of introduction of service tax. It is to be seen whether LIC would increase the bonus rates to compensate the increase in premiums. If they do not, it will be a loss to customers.

5) Agent’s commission structure changed

This is perhaps the most important aspect of the changes that IRDA has introduced in life insurance policies. The commission structure of agents from these policies has been changed. Agents will now receive a maximum commission of 15% for the 1st year, 7.5% for 2nd year and 5% after that. Also, for agents to be eligible for these commissions, minimum premium payment term should be 5 years.

How will it affect you?

Commission paid to agents has always been an area of concern for customers. Previously, agent’s used to receive commissions up to 35-40% on traditional policies. Indirectly, these commissions had resulted in you paying higher premiums on your policies. There is nothing wrong in incentivizing agents for selling products, but it has to be a win-win situation. The change is agent’s commission structure will surely benefit customers in the form of lesser premiums. Agents would also encourage customers to opt for long tenure policies since their commissions are designed in such a way.

  • rajiv ahuja

    I know I am subscribed on your mailing list . But I don’t get your blog on my e-mail. My e-mail is rajivahuja06@gmail.com

  • P


    Will these changes be effective for old policies also ?

    I have policy from past 3 years.

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