Cost of new insurance policy likely to increase

FM's revival package for life insurance sector will lead to high growth-high risk investments, lesser documentation

The good news is that buying insurance products may involve lesser documentation, charges on traditional insurance products may be capped and more tax incentives may be announced. Here's some bad news, cost of buying insurance may go up and investments may involve higher risk. The Finance Minister's revival package for the life insurance sector has some gain and some loss for you.

The long pending guidelines on traditional insurance products — endowment and moneyback — may be on its way, say industry experts. The minister's agendas talk about reducing the arbitrage between unit-linked and traditional plans. After the guidelines on unit-linked products were announced in September 2010, demand for traditional policies have increased. And since, the insurance regulator has been wanting to bring in some regulations on the same. “This has led to a huge arbitrage opportunity for policy manufacturers, who have been pushing traditional plans to new customers. This gap may soon be bridged,” says a senior executive of Star Union Dai-chi Life Insurance.

For instance, if a traditional policy lapses in the first three years of buying the policy, the policyholder gets back nothing. But, a unit-linked policyholder's money is moved to a discontinued policy fund, where it earns an interest and is handed over to the policyholder at the end of the lock-in period (five years of policy).

Similarly, today a traditional product earns up to 30 per cent of the first year premium, seven-eight per cent of the second year premium and four-five per cent for the rest of the policy term. While unit-linked plans pay up to five-seven per cent in the first year and even less for the following years.

However, insurance companies may be allowed to manage their management expenses on their own. While this will give flexibility to the companies and is a big positive for their sales force, this may affect your cost of buying a new policy.

Presently, insurance companies have to plan their expenditure (like agents' commission) as per the norms of Section 40B and 40C of the Insurance Act. These sections chalk out the limits for management expenses. There is no cap on the amount companies can spend on various heads as long as they adhere to the norms.

But, insurers say, the regulator had issues if it noticed more funds being allocated towards a particular head. If these norms come into effect, industry players say, they can spend at will.

Explains V Srinivasan, CFO of Bharti AXA Life Insurance, “Say an insurance firm pays 10 per cent of the premium towards agent's commission. Then, with these norms, it will be able to pay a little more to the agent. This will specially help high volume generating agents. Plus, today all sales channels are being paid similar commissions, which could not have carried on for long.”

If an insurer pays 10 per cent commission to individual agent and 15 per cent to banking channel, it averages both these cost to price insurance policies. Therefore, if companies allocate more towards marketing and distribution, it will lead to higher pricing for policyholders, as well.

“Given the state of the industry, we need to push more to get going on the growth path. That will mean higher cost for the companies and in turn, for customers,” says a senior actuary.

If the law of 75 per cent investment in AAA instruments is relaxed, you stand to earn higher returns. At the same time, your money will be invested in less safe instruments. That is, companies could put your money in AA rated papers, which may not be unsafe, but are riskier than AAA papers.

Tax incentives are also being considered for life insurance policyholders. Service tax on first year regular premium and single premium may be lowered. Thus, lowering your cost. Also, annuity products may be treated on par with the New Pension Scheme (NPS). Some pension products approved by the Insurance Regulatory and Development Authority (Irda) may be included in the separate limit, over and above the limit of Rs 1 lakh under Section 80C of the Income-tax Act.

Irda may accept banks’ Know-Your-Customer (KYC) norms to cut cost. This means, you will not need to undergo additional documentation to buy insurance.