Insurance Regulatory and Development Authority (Irda) has recently made far-reaching changes in favour of the policyholder. In the past five years or so, insurance in India has become predominantly an investment product, leading to a sharp rise in the sales of unit-linked insurance policies (Ulips).

Ulips continue for 12 to 15 years or more with regular premiums, and are helpful in meeting certain financial goals. They are also a useful tool for asset allocation as a policyholder can freely (or at a nominal cost) shift across asset classes (liquid to debt to equity).

However, the problem arises when Ulips are sold purely as investment products. The flexibility in the amount of cover that is needed should be weighed heavily in favour of capping insurance to just five times that of annual premium. 'Pay only for three years' was a theme well exploited by insurance salesmen to pander to the investor's needs of 'not locking money for the long-term' without warning the policyholders that Ulips have higher upfront costs which get amortised as the tenure increases. All these problems have been fixed .

The minimum period for staying invested in Ulips has been increased to five years from three earlier. The maximum charges on the policy have been capped as a percentage of premiums paid a few months ago. The surrender charge for the early years has been reduced dramatically. There has also been a sharp reduction in the agents' commission which was a major bone of contention. The minimum life insurance cover criterion has been upped to 10 times the annual premium, and every top-up in the policy gives you additional life cover.

Finally, need-based selling has been introduced as a concept and the agent is required to maintain details of the consumer's lifestyle as well.

But what have we consumers done about enhancing awareness? Do we know the right questions to ask our advisor when we buy insurance? Why do we allow our 'advisor' to beguile us from 'switching' an existing insurance policy to a new one? The agent is thus successful in earning a much higher commission on the same quantum of money that you were buying your earlier insurance with.

Traditional policies are also making a comeback. Many insurance companies have come out with guaranteed products in the Ulip space, and have launched newer versions since September. But a bulk of the movement has taken place in traditional products. The reason is fairly apparent: there is no provision for disclosing agent commissions for traditional products, and there has also been no attempt to reduce or control the quantum of the payout. So it's business as usual for insurance salesmen. Transparency and honesty are essential ingredients of successful insurance sales, and let's hope that self-regulation ensures that selfish avariciousness is not tolerated. We do not want traditional policies to go through a revamp just like Ulips sometime in the not-too-distant future.

Source: The Economic Times