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Life Insurance Policy Now More Harmful For Your Pockets

Are you planning to buy, a moneyback or endowment type of life insurance policy, in this annual tax-saving season?

If no, brilliant! If yes, terrible!

Agreed, it is lot more convenient to buy a single product, that gives the triple benefit of Insurance, Investment and Tax-Saving.

However, we have to pay a huge (huge) price for this convenience. Hence, it is extremely unfortunate and foolish, if we still go ahead and take such a stupid and dreadful step.

The problems with such policies have been repeatedly highlighted by me and many other financial experts. In case you missed or have forgotten, please read the following blog posts:
- Don't Buy Insurance for Investment Purposes
- Life Insurance : A Terrific Concept but Terrible Product
- You just lost Rs.4.80 lakhs!

Now, to add to this misery, there's some more bad news:

With effect from April 1, 2017, such life insurance policies will cost you more.

IRDAI has, vide its notification 'Insurance Regulatory and Development Authority of India (Payment of commission or remuneration or reward to insurance agents and insurance intermediaries) Regulations, 2016', announced a hike in the commission payable to the insurance agents.

But, before we look at the new commission structure, we need to understand a couple of terms:

a) Commission or Remuneration: Compensation paid to an insurance agent for procuring an insurance policy.

b) Reward: This is a new addition to an agent's income. It is the amount paid as an incentive towards any benefits (such as gratuity, telephone charges, office allowance, sales promotion gift items, competition prizes) and / or services offered (such as risk analysis, gap analysis, plan design, predictive modeling, data management, infrastructure, advertisement). It also includes any additional incentives by whatever name called.

Coming to the new commission structure:

The maximum commission or remuneration payable to an insurance agent / insurance intermediary — plus reward @20% of the first year commission paid — will henceforth be as under:

A. Single Premium Life Insurance Policies for Individuals

Pure Risk Policies (i.e. Term Insurance) : 7.5% of the premium + Reward @20% = Total 9.00%

All other types of policies (e.g. moneyback, endowment) : 2% of the premium + Reward @20% = Total 2.40%

Annuity Plans (immediate or deferred) : 2% of the premium + Reward @20% = Total 2.40%

life-insurance-policy-harmful
Buying a (non-term) life insurance policy could be as harmful as this.

B. Regular Premium Life Insurance Policies for Individuals

Pure Risk Policies (i.e. Term Insurance)
First Year : 40% of the premium + Reward @20% = Total 48%
Annual Renewal : 10% of the premium every year

All other types of policies (e.g. moneyback, endowment) 
For the first year, with Premium Payment Term of
- 5 years :  15% of the premium + Reward @20% = Total 18.00%
- 6 years :  18% of the premium + Reward @20% = Total 21.60%
- 7 years :  21% of the premium + Reward @20% = Total 25.20%
- 8 years :  24% of the premium + Reward @20% = Total 28.80%
- 9 years :  27% of the premium + Reward @20% = Total 32.40%
- 10 years : 30% of the premium + Reward @20% = Total 36.00%
- 11 years : 33% of the premium + Reward @20% = Total 39.60%
- 12 years or more :  35% of the premium + Reward @20% = Total 42.00%
  
The above policies will get a commission @7.5% of the premium, on policy renewal every year (earlier only 5% was payable from the 4th year onward).

Annuity Plans (immediate or deferred)
First Year : 7.5% of the premium + Reward @20% = Total 9.00%
Annual Renewal : 2% of the premium every year

VERY IMPORTANT
As compared to the above...
... there is ZERO cost in opening a Fixed Deposit Account
... there is ZERO commission on Public Provident Fund
... there is ZERO / Small Brokerage on Tax Free Bonds
... there is ZERO entry load + max 2.50% Annual Fund Management Charges on Debt Mutual Funds

Given that these products are very similar in nature to investment in the insurance policies, it makes absolutely no financial sense to bear such exorbitant commissions on insurance. Ultimately, they are going to substantially eat into your returns.

By the way: Higher commission payable on term insurance is fine, as NO returns are involved with such policies. Of course, insurance companies may hike the premiums on term plans, due to increase in the commission. But that should not matter much, because the premiums on term plans are anyway quite nominal. So the impact will be minimal.

C. Non-Life Insurance Policies

The maximum commission / remuneration payable on other types of insurance policies — plus reward @30% of the commission paid — would be as under:

a) Health Insurance Policies for Individuals : 15% + Reward @30% = Total 19.50%

b) Vehicle Insurance
Comprehensive Policies : 15% on the Own Damage Cover only + Reward @30% = Total 19.50%
Standalone Third Party policies : 2.5% + Reward @30% = Total 3.25% 

c) Misc. Policies for Retail
To Insurance agents : 15% + Reward @30% = Total 19.50%
To Insurance intermediaries : 16.5% + Reward @30% = Total 21.45%

Other Salient Aspects

Meanwhile, following are the other salient aspects of the above-mentioned IRDAI Regulations on Agents' Commission.

1. Insurance agents are individuals and represent one insurance company only. While, insurance intermediaries comprise the Corporate Agents, Insurance Brokers, Web Aggregators and Insurance Marketing Firms.

2. Each insurance company will have a Board-approved policy on payment of commission or remuneration or reward to the insurance agents and insurance intermediaries.

3. No commission would be payable to any agent or intermediary, if the insurance company directly procures a policy.

4. Reward is payable only to the (a) insurance agents and (b) insurance intermediaries whose revenues from insurance intermediation activities is MORE than 50% of their total revenue from all activities. In other words, insurance intermediaries, with revenues from insurance intermediation LESS than 50% of their total revenue, are not eligible to receive any rewards.

5. Reward is to be calculated on an overall basis, and not linked to each and every policy procured by the agent / intermediary.

MOST IMPORTANT
Insurance agents are NOT ALLOWED to pass on the commission, either partly or wholly, to their customers. Yet, very few agents follow this rule. In fact, most policy buyers expect and demand pass-back of a part of the agents' commission. This is nothing but being 'penny wise pound foolish'. This dubious and unlawful practice ultimately hurts you the most.

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