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Good changes in Insurance from 2014, but not good enough...

The year 2014 brings a new dawn to the insurance policies in India... more particularly the traditional insurance plans such as endowment and money-back policies. (ULIPs, as you may be aware, had been redesigned and restructured earlier.) 

These changes, stipulated by Insurance Regulatory Authority of India (IRDA), make the insurance policies a lot more pro-customer —  higher cover, higher surrender value, transparency, lower agent commission — vis-a-vis the existing ones.

1. Higher insurance cover
Earlier, the insurance policy was structured primarily as an investment product by keeping the insurance cover to the minimum. This defeated the very purpose of buying an insurance policy for protecting one's family. Now policy buyers of age 45 or more would have to be insured for a minimum 10 times the annual premium and for those less than age 45 the minimum cover has to be 7 times the annual premium. But, as tax benefits are available only if the cover is at least 10 times the annual premium, even those in age group of less than 45 should opt for minimum 10 times cover.

2.  Higher surrender value
Henceforth, you will get more money back if you have to surrender your policy prematurely.
- Policies of term less than 10 years will acquire surrender value after 2 years as against 3 years earlier (no change w.r.t. policies of term > 10 years)
- As against a surrender value of 30% of the premiums paid 'excluding' the 1st year premium, now minimum surrender value after 2/3 years would be 30% of premiums paid 'including' the 1st year premium
- From 4th to 7th year, the minimum surrender value would be 50% of the premiums paid (90% in the last two years if the policy term is less than 7 years)
- Beyond 7th year, as approved by IRDA for the specific policy 

3. Lower agent commission
As against high commissions in the past, now the agent commission would be linked to the Premium Paying Term (PPT) of the policy. 
- If PPT is 5 years, the commission will not exceed 15% in the first year. 
- For 8 years PPT, the 1st year commission cannot exceed 24%
- For 10 years PPT, the 1st year commission cannot exceed 30% 
- Only if the PPT exceeds 12 years, 1st year commission can be up to 35% (if the insurance company is more than 10 years old) / 40% (if the insurance company is less than 10 years old).
(For 2nd and 3rd year, the max. commission is fixed at 7.5% and thereafter max. 5%).

4. Transparency in applying service tax
While private insurers were already levying the applicable service tax on the premium payable, LIC was not doing so. That doesn't mean that LIC was not liable to pay service tax. Rather, instead of charging service tax to each individual policy, LIC was paying the service tax out of the pool of money collected from the investors. This meant less money available for bonus payout. So indirectly, the LIC policy holder was also paying service tax. From 2014, even LIC will start levying service tax transparently on each individual policy premium. Accordingly, the bonus payout will be more. So net net no financial impact!

In addition, with LIC planning to use the updated Mortality Table, the amount of premium payable towards covering your life (called Mortality Charge) is expected to come down.  

All these changes make the new life insurance policy much more customer friendly. 

Having said that, keeping insurance and investment separate still makes lots of sense. Buy pure insurance cover (i.e. Term Plan) for insurance purposes and pure investment products (PPF, post-office schemes, MFs, shares, bonds, FDs, etc. etc.) for investment purposes and you shall be better off.

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