In a drive to prevent agents from misleading clients into surrendering their existing life insurance policies at a loss and, then, encouraging them to buy a new policy, the insurance regulator has come out with an exposure draft. No insurance agent, intermediary or insurance company will be permitted to replace a life insurance policy, except if it is in the interest of the policyholder.
The Insurance Regulatory and Development Authority (Irda) has stated that an intermediary or agent will have to make every effort to keep in force the existing life insurance policy or annuity contract. If there is a replacement of a life insurance or annuity policy, the agent or the intermediary will have to obtain a written consent from the policyholder and get all details of the existing contract.
The policyholder will have to give a written declaration stating that he has been advised that there may be certain disadvantages in replacing the policy and he has taken the decision after understanding its financial consequences. The intermediary, agent, or the insurance company official will have to explain the consequences of replacing the existing life insurance policy or annuity cover to the policyholder in writing.
“On examining the existing business practices adopted while soliciting the life insurance business and in order to protect the interests of policyholders by letting them have an informed choice while replacing the existing policies, the authority proposes to issue suitable guidelines,” says the Irda’s draft exposure. Stakeholders have to forward their views to the regulator by July 20 and, thereafter, the final guidelines will be issued.
Analysts say the urgency shown by Irda reflects the fact that churning is very much rampant in the industry. “Churning schemes just to earn some extra commission has eroded the trust of policyholders in life insurance, which is the second most popular financial products after bank fixed deposits for retail investors,” says Amit Goyal, a financial consultant.
Life insurance policies are beneficial in the long run and replacing the existing policy for a new one will result in paying higher premium for the same sum assured due to advancement of age. The policyholder will have to pay an extra premium because of changes in lifestyles and may even face loss due to withdrawal. The other disadvantage of replacing an existing policy is that the insurance company may deny or not carry forward all