Wednesday, March 7, 2012

Demystifying life insurance

Enough is enough! It’s time to call time on misleading, hyperbolic nonsense that life insurance marketing has become. It’s also time to demystify life insurance and make it simple, easy-to-understand, meaningful and really useful.

If you verbalise the current thinking of the Insurance Regulatory and Development Authority of India (Irda) on the state of life insurance, that is probably how it would read.

The missionary zeal with which the insurance regulator has proposed a set of suggestions and recommendations to the life insurance industry exemplifies the regulator’s intent to bring in more clarity and transparency to the way insurers design life insurance products.

From now on, Irda’s February 16 letter to insurers and the Life Insurance Council said, complicated products are a strict no-no. The way they are peddled now is also a cause for concern, it stated.

What got Irda’s goat was that more and more new “complex products” were lined up for its approval. The products’ features, an irate Irda found, were not in alignment with the prescribed best practices.

Worse, they lacked clarity. Irda did not mince words when it dashed off the said letter. “Greater amount of clarity is required to ensure policy-holders’ protection and sound insurance principles.”

The Irda letter has now become something of a talking point in industry circles.For, it addresses various issues relating to design and structure of life insurance products. The key points are instructive indeed:

Limited life cover
Certain products like single premium Ulips (unit-linked insurance plans) and endowment plans offer limited life cover in proportion to the premium paid. For instance, these policies provide a sum assured (SA) that is just five or six times the premium paid annually. (Example: if annual premium is Rs1,000, then the SA would be around Rs6,000.) This is laughable, according to Irda. The SA should be at least ten times the premium paid, it believes. Irda also suggests there be a minimum life cover for life insurance policies at the event of death or on completion of term or tenure.

Participating and non-participating policies
Insurance companies file new products with Irda classifying them as eitherparticipating (par) or non-participating. Under par (or with- profit) products, policy-holders are entitled to receive the surplus of the company. Premiums collected from these products are pooled and invested. Policy-holders will be entitled to receive part of the company’s surplus as bonuses. All traditional products other than pure term policies come under this category.</div>

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