The prime festive season may have just ended, but ‘Hurry! Offer only till stocks last’ sales pitches of a different kind have started. Life insurance distributors are pushing prospective policyholders to buy policies before 30 November, 2019.
The new Insurance Regulatory and Development Authority of India (Irdai) life insurance product guidelines will come into force from 1 December, 2019. This means insurers will withdraw non-compliant products before that.
‘New plans will come with increase in premiums’, ‘Guaranteed returns will be lower’ are some of the reasons distributors are putting forth. Take their advice with a pinch of salt. “There could be an increase in premiums but it would not be too substantial. Moreover, more premium would mean better features for the customer,” says Karthik Raman, CMO and Head, Products, IDBI Federal Life Insurance.
- Bonanza for pension plans
For those looking to buy pension plans, the new regime will be worth the wait. “Pension plans will be more customer friendly, thanks to additional flexibilities in withdrawal at maturity, premature withdrawal and investment options they will offer,” says Mrin Agarwal, Founder, Finsafe India. For new pension plans sold after 1 December, the maximum commutation —lump sum withdrawal—allowed at maturity will be 60%, up from 33% currently. Even if newer plans offer lower returns as agents warn, benefits like these will offset likely hikes. However, the proceeds beyond the one-third withdrawn as lump sum will continue to be taxable, unlike NPS.
The pension Ulip segment lost its lustre after the regulator made it mandatory for insurers to offer guarantees on maturity proceeds. This meant that insurers had to invest in debt instruments, bringing down return potential. Now, this is optional.
The new rules allow freedom to policyholders to decide whether they want the guarantee or not. If you are young and have a long-term investment horizon, you can choose to invest higher proportion in equities to create a larger retirement corpus. Policyholders were also not given a choice to purchase annuities from other insurers at maturity as per the existing rules. Post 1 December, you will not be completely tied to the insurer from whom you purchased the plan. You can use up to 50% of your corpus (balance after lump sum withdrawal) at vesting to purchase annuities from the insurer who offers higher returns.
Worth the wait
Newer features warrant postponing purchase decision
- Flexibility for Ulip buyers
From 1 December, the minimum life cover under Ulips will be scaled down from 10 times the annual premium to seven times even for those under 45. Since life cover entails mortality charges, lower cover will mean more of the premium will be available for investment, thus boosting returns.
However, clarity is yet to emerge on tax benefits under Section 80C and 10(10D). To maximise benefits under these sections, a life policy has to offer a minimum cover of 10 times the premium. If you need the tax breaks, insist on a life cover that is 10 times the annual premium.
- Wait and watch
The newer products set to be introduced will be relatively more customer-friendly. For one, endowment policies with tenures over 10 years will acquire surrender value if two years’ premiums are paid, instead of three earlier. Surrender value is the amount you stand to get in case you make a premature exit.
For older policies, this was limited to 30% of premiums paid (minus any survival benefits paid out by the company). This will go up marginally to 35% after 1 December. While penalties for early exit continue to be steep, newer policies would still be a step ahead of the older ones. In addition, for policies with tenures greater than seven years, Irdai has said surrender values should increase progressively and converge to at least 90% as the policy moves closer to maturity.
Do not, however, pick endowment plans merely to avail these benefits. Choose them only if your prime objective is safety rather than growth and you are convinced about their utility value. “When you have committed to paying premiums over the entire tenure of 15-20 years, it does not make sense to base your decision on rules for premature exit,” says Mohit Garg, Head, Products, PNB Metlife Insurance.
- Other benefits that matter
There’s more to the new avatar besides better surrender benefits. Inability to service recurring premiums over the long term is one of the key reasons for policy lapsations. This could be due to regular premium policies mis-sold as single premium ones or genuine financial crunch in the interim. The new regime offers some relief for the latter category. Such policyholders can reduce premiums by 50% after five years and keep the policy in force. Irdai has provided more leeway for policyholders who wish to renew their policies after discontinuing premium payment in the interim. The revival period for traditional plans has been extended to five years instead of two so far.
- No impact on term plans
If you are looking for a pure risk term insurance policy, where policyholder’s dependents get the sum assured in case of his or her death, do not put off your decision. “If life cover is what you seek, it is wise to secure protection for yourself and your family as soon as you can,” says Garg. Exigencies can come unannounced and it is best to be prepared at all times and start as soon as you can.