Life insurance: Ninety-day window

Apr 04 2014, 12:36 IST
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SummaryLife insurers can now collect premium for a maximum three months in advance

As per a latest Irda notification, insurers can now collect premium for a maximum three months in advance for both linked and non-linked plans. However, the premiums collected in advance can only be adjusted on the due date and commission to agents paid after that.

The Insurance Regulatory and Development Authority (Irda) has said that advance collection will be allowed only for the premium due in the same financial year. However, in cases where the premium due for the next financial year is being collected in the current fiscal, the insurer can collect the premium for a maximum period of three months in advance of the due date.

Also, the premium collected in advance will have to be adjusted on the due date and not from the date of clearing of the cheque. The commission to the agent will have to be paid after adjustment of premium on the due date only.

In February last year, the regulator's gazette notification for both linked and non-linked insurance policies had underlined that advance premium collection will be accepted only 30 days before the due date.

For the monthly premium payment mode, the insurer can accept three months' premiums in advance only

on the date of commencement of the policy, if it is a monthly mode of payment and is allowed under Irda’s file-and-use procedure.

Similarly, for unit-linked insurance policies, the gazette notification had mandated that units be allocated on the day the proposal is accepted and the premium money adjusted. Also, the premium will have to be adjusted on the due date even if it has been received in advance and the status of the premium received will have to be communicated to the policyholder.

Insurers, especially, in non-life category, try to collect the premium in advance by offering discounts. This ensures that the policyholder does not switch to another insurer. Analysts, however, say Irda’s move for 30-day advance payment was done to prevent mis-selling as agents often entice policyholders with discounts. State-owned Life Insurance Corporation had, at one point of time, allowed premium payments five years in advance for its traditional policies.

The 30-day advance premium collection norms in February last year had rattled the industry, which had argued that companies ask salaried employees for investment proof by end of January. So, employees often pay premiums in advance to get a receipt and claim tax deduction. Also, employees often find it convenient to pay in advance to meet other financial goals and avoid last-minute crunch. They argued that many policyholders have fluctuating income and it is convenient for them to pay premiums whenever they have cash in hand. If a policyholder insisted for advance payment for tax rebates, companies used to collect the premium up to six months ahead of the due date without giving any discount.

The regulator's circular on advance premium collection also comes after it found that SBI Life had collected second year's premium upfront, along with the first year premium, for Dhanaraksha Plus Limited Premium Paying term (LPPT) plan. “It is noticed that 93% of the second-year premiums were received in advance, along with the first-year premium in 2008-09, 94% in 2009-10 and 97% in 2010-11. Thus, the premium collected is more on lines of a single premium than two yearly premiums against the approved file-and-use features,” the Irda said in its notice to SBI Life Insurance.

The regulator found that the insurer had paid 40% of the first year premium as first-year commission to agents and another 7.5% of the second year's premium as second-year commission.

“However, had the single-premium version of the product been offered to policyholders, the actual commission payable would have been only 2%. Hence, it can be concluded that the large scale sale of LPPT as single-premium payment policy has only facilitated higher commission payments to insurance intermediaries involved who are predominantly SBI and its associate banks,” the regulator notice said.

Irda has directed the company to refund R275 crore to members of the group insurance scheme, which were wrongfully collected from 2008-09 to 2010-11. In 2010, the regulator had fined SBI Life Insurance R5 lakh for misselling its Dhanraksha Plus LPPT. The refund order by the industry is the biggest in the Indian insurance history and experts say it will send a strong signal. SBI Life Insurance, however, has said it will appeal against the order. Analysts say the regulator’s move to allow premium collection three months before the due date will be a relief to insurance companies and also benefit policyholders who are travelling or relocating abroad.

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