LIFE INSURANCE: ENDOWMENT POLICY

Policy Term: Premium Paying Term: Commission

We previously spoke about how changes to the IRDA regulations affected bonus entitlements, and minimum death benefits with exclusions.

Definition once again

Endowment insurance plans are made to provide a significant payout in the event of death, as well as, if necessary, survival, maturity, and profit sharing.

Policy term

The Policy Term is the period for which the Insurance Company is under risk and signifies the existence of a valid policy contract.

Premium paying term

The amount of time that the policyholder must pay premiums to maintain the contract's validity is known as the Premium Paying Period. The average premium payment period corresponds to the insurance term in length. Yet, some insurance agreements permit the insured to select a premium payment schedule that is shorter than the policy term. The policy term must be no longer than the policy term. The Insurance Term may not, under any circumstances, exceed the Premium Paying Term.

Regarding the Policy Term and the Premium Paying Period, the codification represents a considerable departure from the previous regime. Under the new Regulations: - 

• A minimum policy term of five years is required.
• All plans, excluding single premium policies, must have a minimum premium-paying duration of five years. Single premium insurance, which is necessary to collect all premiums at once, is the only exception.

There are no limitations on the flexibility that can be granted in Limited Premium Paying Terms with regard to the Policy Term as long as the minimum Premium Paying Term (single premium policies are exceptions) is at least 5 years.

The regulation is in place for a good reason. The Insurance Act forbids commissions on single-premium insurance policies to be higher than 2%. It is clear that this percentage is insufficient to catch the interest of distributors. Additionally, for insurance with recurring premiums, the Act enables a substantially larger commission rate. Although certain businesses sold single premium plans that were theoretically considered to be non-single premiums, a higher rate of the commission may be paid out. As a result, the Insurance Act was breached.

It was decided how much of the premiums were to be used as commission. Before this point, commissions weren't associated with any clear criteria. Most of the time, the suggested maximum rates were adhered to. To encourage the sale of longer-term plans, the IRDA has tied the commission rate to the length of time that premiums are paid in compliance with the new laws. As previously stated, the commission will be a percentage of the premium paid; typically, the proportion is determined as three times the term for which the premium is being paid; single premium policies are still subject to a 2% commission rate on premiums. There won't be any changes to the commissions paid in the upcoming years. Conditions for brokers and new insurance enterprises range slightly from one another. There are different rates for pension products and we shall consider them separately.

Every consumer should thoroughly investigate any insurance policy and contrast all insurance plans provided by different insurance companies before making a purchasing decision. 

“It's not just about how much insurance you need; it's about how much your family will need to survive without you and how much you'll need to achieve your long-term goals.”

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