Last month, the insurance regulator proposed changes to the structure of life and health insurance products. These changes are under active consideration. In life insurance, the proposals, by themselves, are incremental, but when put together will benefit the policyholders significantly. The health insurance changes are more radical and will help buyers.

More flexibility

A broad theme in life insurance is greater flexibility . This is an issue, as once a purchase is made, it is difficult to make changes.

The proposal is, in unit linked life insurance, the premium can be reduced after five years by up to 50 per cent through a reduction in sum assured. Insurances that lapse can be reinstated in five years compared with three years previously. Insurers may offer to spread maturity payments over 10 years and link them to external benchmarks. These options are not available today.

Riders, such as for critical illness, can be attached to unit linked or traditional insurances. The minimum SA that will be allowed in life insurance is proposed to be reduced for people below 45 from 10 to seven times the annual premium.

There has been an effort to improve the quality of pension plans. Currently, 66 per cent of the maturity amount in a pension plan must be converted to annuity; this is proposed to be reduced to 40 per cent.

Annuity can be bought from any insurer and not just from the one who sold the pension plan. This should create healthy competition. Another change is to allow partial withdrawals in pension plans. These make them more competitive with the New Pension Scheme.

Lower surrender charges

Traditional life insurance products, where bonuses are declared each year, have high surrender charges.

The regulator has proposed slightly lower surrender charges and specified thresholds for late surrender. In the current plans, the surrender value is paid from the third year. This is proposed to be paid from the second year. The minimum guaranteed surrender value in the second and third years will be increased from 30-35 per cent. Importantly, after four years, the minimum guaranteed surrender value will be 90 per cent. This is not specified in the existing products. Insurers will pay more than the guaranteed surrender value if the insurance is terminated prematurely.

A specific issue that seniors face in some products is the maturity amount being less than premium paid, because mortality costs are high. The regulator’s mandate is that the maturity value must be at least 100 per cent of the premiums paid.

Another proposal is to include an independent actuary in the With-Profits Committee that sets annual bonus rates and ensures that policyholders are treated fairly.

Pre-existing diseases

On health insurance, the proposed change in the definition of pre-existing diseases is an improvement. Now, most claim rejections are due to pre-existing conditions. The definition excludes diseases, even if the policyholders were not aware of the disease but had “signs or symptoms”. The proposed definition shifts the responsibility on the insurers to prove that policyholders were diagnosed with a pre-existing condition.

Other positive changes proposed are: After eight years of renewal, a health claim cannot be rejected unless fraud is established. A list of 17 diseases has been excluded, provided they are pre-existing. The regulator is considering improvements that benefit policyholders and seeks to execute these changes.

The writer is Managing Director, www.securenow.in

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