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You may be able to buy a policy at a lower cost with higher life cover as well as surrender value after the insurance regulator announces the guidelines for traditional endowment plans
You should wait for a few more days if you are planning to buy a traditional endowment plan this tax- saving season. The Insurance Regulatory and Development Authority (IRDA) on Monday has hinted that the final guidelines for traditional plans will be released after the Insurance Advisory Committee's meeting this Friday.
Last year, the draft guidelines on traditional plans had made a case for lower charges and higher life cover as well as the surrender value, among other proposals. As things stand today, life insurers may have to refile a large chunk of their endowment portfolio by June 30.
To Buy Or Not To Buy
Insurance companies and their sales forces are heavily promoting these products now. In fact, traditional insurance products regained their top spot after the insurance regulator clamped down on unit-linked insurance plans, or Ulips, two years ago. After the new guidelines on Ulips, insurance agents also switched loyalties to traditional products due to the higher commissions attached to them.
Moreover, investors, too, are keen on endowment plans for their assured return promise, as very few have regained confidence in the stock market. If you are going to take the endowment plan to save on taxes, you should wait for a week for clarity. "It may make sense to find out if the new norms would be more investor friendly, and then invest. In their current form, it is not such a great proposition. The new products are likely to have lower charges and possibly higher cover and surrender value.
The draft guidelines give some indications on this front. For example, commissions could be capped to three times the premium payment term. That is, if you have chosen a premium paying term of 10 years, the commission charged will not be more than 30%.
Also, Insurance Regulatory and Development Authorityhas recommended offering a minimum surrender value calculated on the basis of the year of surrender.
Policyholders will see a benefit in terms of increased minimum surrender value. At the moment, the guaranteed surrender value (GSV) is around 30% of the premiums paid minus first year premium, irrespective of the number of policy years gone by. Those staying with the policy for a longer term will see direct guaranteed benefit from the new guidelines, assuming they are finalised in their current form. However in the current scenario, the special surrender value (for participating products) was anyway much higher than GSV and close to what is being proposed as GSV. The minimum life cover, too, is expected to be enhanced to 10 times the annual premium for those under 45.
As such, Irda norms are expected to be beneficial to the policy holders and may result in reduction of charges, among other things. However, the nature of the product and other broad features are likely to remain similar and any improvements may only be marginal.
Study The New Features Closely
While certain benefits are clear, insurance-seekers need to be aware of the flipside, too. "Policyholders – especially those who are over 50 – need to bear a key point in mind with respect to death benefit.
It is likely to go up in the newer traditional plans. So, you may see insurers introducing caps on maximum age at entry or exit.
Therefore, people in the age group of 50 and above may consider buying the current plans, as they may find it difficult to buy one later. Even the recommendations on surrender value may not have a significant impact, feel some.
Also, remember, higher sum assured means higher mortality charges. People buy endowment policies with the savings objective in mind.
Such policyholders may find the new version unattractive as the mortality charges will eat into the premium amount directed towards investment.
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