Compulsory term insurance proposal gets mooted

Term insurance, which is the oldest and simplest form of insurance, is needed to be made mandatory. That is what life insurers are mooting for, to be included in the budget provisions for 2014-15. According to industry sources, life insurers are looking to have mandatory term insurance for all salaried employees in organisations in India.

"When third party auto insurance is mandatory in India, then why not term insurance," said a senior private life insurance executive. The official explained that not just from an insurance perspective, but from a customer perspective too, mandating basic insurance would be beneficial.

A pure term insurance is an insurance policy where a policyholder or a relative pays premium for a particular tenure. If the insured dies within the tenure, the entire sum assured is paid to the kin. If the policyholder survives beyond the tenure, no money is paid. While some term products do allow money-back at end of tenure, the others don't.

Industry officials said that though this proposal has been presented to the finance ministry informally earlier, the life insurers are looking to again present it to the ministry prior to the budget session.

Unlike other countries, India does not have a social security scheme to deal with insurance needs of individuals. Hence, insurers opined that having term insurance as mandatory could be advantageous for the policyholder. According to a senior large life insurance company executive, the existing options provided by companies look solely at wealth accumulation and savings and not on individual life risks.

While the proposal may help improve insurance penetration in the country, experts pointed that implementation challenges could be faced. "Companies already have provident fund and gratuity for employees. They may not be open to having another mandatory scheme for employees, since it would require them to put aside some funds for this too," said the chief executive officer of  a mid-size life insurance company. The structure and mechanism of this mandatory term insurance proposal is still being discussed.

According to the Insurance Regulatory and Development Authority’s annual report for 2011-12, insurance penetration, which surged consistently till 2009, slipped for the consecutive second year to 4.1 in 2011, compared with 5.1% in 2010. Insurance penetration is the ratio of insurance premium to gross domestic product.