It is common for insurance agents to exaggerate the benefits and returns made on a policy, just to make a sale. To avoid consumers from being mis-sold products, the IRDAI (Insurance Regulatory and Development Authority of India) in September had instructed insurance companies to compulsorily issue 'benefit illustration' on all policies to its customers.
As per the regulator's instructions, these are to be provided to prospective buyers at the point-of-sale for all life insurance products except for those under IRDAI (Micro Insurance) Regulations 2015, Guidelines on Point of Sales (POS)- Life Insurance Products 2016 and IRDAI (Insurance services by Common Service Centres) Regulations 2019.
Guidelines regarding the same were issued and are required to be followed by insurance issuing companies from 1 December 2019.
You need to know some of the basic rules issued by IRDAI to understand a benefit illustration and make the right choice of insurance policy for yourself.
1. Ask for company-issued illustrations
At the point-of-sale, that is, any place where the agent/employee of the insurance company interacts with you about the policy for the first time, you as a customer are required to be presented with a benefit illustration that clearly states the features of the policy. The agent may show you an illustration they created on their own or not show one at all.
As a prospective buyer, you should ask for the company generated benefit illustration of the insurance policy.
2. Guaranteed and non-guaranteed benefits
Companies are required to make a clear distinction between guaranteed and non-guaranteed (variable) benefits. Further, the extent to which the non-guaranteed benefits will vary has to be specified. These non-guaranteed benefits form a part of market-linked products like ULIPs (Unit-Linked Insurance Policy).
The insurance company will mention that these are different from traditional life insurance companies and hold an element of non-guaranteed benefits. The illustration will show what charges will be deducted as the client's premium and how the unit fund, its net of charges as well as taxes will grow over the years of holding the policy (as it does in the case of ULIPs).
For example, if the illustration states a 'net-yield of 8% p.a,' it means that the gross investment returns on the policy will be 8 percent, however, it will not consider mortality, morbidity charges, underwriting charges, guarantee charges and cost of riders.
In the illustration, ideally in the form of a table, you will also be demonstrated the impact of charges and taxes on the net yield. You should be aware that charges like mortality charges increase with age.
More importantly, the '8% net yield' should be misunderstood as the exact return on the policy. The returns could be higher or lower based on the performance of the investment in the future and as the policyholder, you will be bearing the risk of investment.
It is, therefore, important to understand that you should not be tricked into assuming that you will get an amount on maturity that may have been projected by the agent for demonstrative purposes.
Also, look for a breakup on costs and charges that will be deducted from the premium and how these will grow with every passing year.
Traditional endowment policies
These come with a guaranteed rate of return and generally the amount to be received at the maturity of the policy is also pre-calculated and specified. The policy's benefit illustration should ideally show how these mortality charges and GST (goods and service tax) are being deducted from the premium paid towards the policy every year and how much premium is being invested towards the policy returns.
4. Illustration forms part of the policy document
The benefit illustration will be part of the policy document and will have to be signed by you (the policyholder) and the agent (or other intermediary involved in the sale process).
You, the policyholder, still has 15 days (free-look period) after the purchase of the insurance policy to read into the details of the policy documents and decide if you want to go ahead with it, after discussions with your family.
5. Digital sales
In the case of online purchase of an insurance policy, the company is required to display all terms and conditions on the main screen of the benefit illustration instead of hiding them behind hyperlinks.
This illustration will be displayed before the customer is directed to the application page to fill a form and pay a premium.
The customer will also be allowed to save and print the final customised benefit illustration. Further, it will be emailed to you on the registered email ID by the company after the online submission of proposal form but before the payment of proposal deposit.