Return on premium products could become costlier

These plans may be required to offer surrender value from Jan 1, pushing prices upwards

Return on Premium (ROP) term products sold by life insurance companies could see a rise in premiums when the traditional product guidelines are implemented from January 1, onwards. These products, which return the premium at the end of the term if the policyholder completes the tenure of the plan, charge higher premiums than pure term products.

According to insurers, these products, which are a offered as a variant of term products, may have to offer a surrender value from January 1 onwards, which would make it more expensive. Pure term products do not offer any cash-back option, if a policyholder completes the tenure of the plan. The sum assured is paid only if on the death of a policyholder, before the end of the policy term.

Sanjay Tiwari, vice-president (strategy and product) at HDFC Life Insurance, said that under the new guidelines for traditional policies, it is possible that insurance companies offering this product will have to offer surrender value, because the insurance regulator could say it is a savings product and not a protection product. "If that happens, then premiums will go up and then it will not be as attractive as pure term plan or as a savings product," he said.

Guaranteed surrender value (GSV) is the cash amount a policyholder gets if she or he surrenders or exits the policy before its maturity.

This value is paid only on products which have a savings component and is not paid for exits made on pure-term policies. ROP products also do not offer surrender value.

According to the new product guidelines by the Insurance Regulatory and Development Authority (Irda), at least 30 per cent of all premiums paid (minus the survival benefits) will be paid to a policyholder if the policy is exited between the second and third year. If premiums are paid for a longer period, the surrender value increased to 50 per cent and higher.

“Customers who are looking at a money-back option prefer to buy a premium return term plan. However, we are anticipating that we may have to pay GSV from January onwards, which could make it unattractive," said the chief actuary of a private life insurance firm.

Insurers said in most cases, the product was sold only because of a push from distributors because commissions are higher. Tiwari explained that HDFC Life had launched one purely out of demand from their distributors.

Several life insurance companies offer the ROP product, either as an individual product or as a product that is offered as the rider in an existing term product. Manoj Jain, CEO of Shriram Life Insurance, had earlier told Business Standard that their money-back term plan was very popular among customers.

Industry officials said that rather than have an ROP product, insurance firms may offer return on premium as a rider to a pure term plan. So, those who want their premiums back can opt for it. However, customers with a high-risk proposition could stand at a disadvantage because death benefits are similar to that of a pure term plan, the premiums could be 10-15 per cent higher than the regular products.