In a strong effort to increase transparency and curb mis-selling of life insurance policies, IRDAI has directed insurers to: mandatorily issue benefit illustrations based on two different assumed rates of return as per a prescribed format; get these signed by the policy holder and agent/insurer; make these a part of the policy; write a warning-type advisory/alert about the non-guaranteed portion of the returns and ensure that all terms and conditions are displayed on main screen in case of digital sales (instead of hidden behind hyerplinks).
Insurance companies must comply with the above by December 1, 2019. The Insurance Regulatory and Development Authority of India (IRDAI) had earlier too asked insurers to provide benefit illustrations but there was no deadline set for compliance. Consequently, most insurers were not following this rule.
A circular stating the above was issued on September 26, 2019 addressed to CEOs of all life insurers. According to the circular, life insurers must show the projected rate of return in their traditional insurance policy products (non-linked) as well as unit-linked insurance plan’s benefit illustrations.
From December 1, 2019, IRDAI has made it mandatory for insurers to provide policyholders customised benefit illustrations that project their accumulated corpus at various stages assuming gross investment returns of 4 percent and 8 percent for each policy, i.e., there will be two investment growth scenarios projected for each policy.
The IRDAI circular states that the expected accumulated value on the date of vesting on the basis of gross investment returns as stipulated by the Authority from time to time, with the caveat, that the projected rates shall not reflect any guarantee. Currently the gross investment returns are 4% p.a. and 8% per annum.
The IRDAI circular directs as follows:
- Every insurer carrying on life insurance business have to provide customised benefit illustrations to proposers or policyholders at the point of sale for all products, except those issued 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 as amended from time to time.
- Such benefit illustration shall be signed by the prospective policyholder as well as the insurance agent or authorized person of intermediary or the insurer involved in the sales process, as the case may be and should form part of the policy document.
- Further, the benefit illustrations have to be as per a specific format prescribed by the IRDAI. The circular contains annexures specifying formats for these illustrations for different types of policies.
The circular further states:
- The illustrations shall be clear and fair to enable a customer to make an informed decision. They shall clearly distinguish between guaranteed and non-guaranteed benefits and state that the quantum of benefits in respect of non-guaranteed category may vary.
- The following phrase must appear on the front page of illustrations in the same font size as the rest of the text: Some benefits are guaranteed, and some benefits are variable with returns based on the future performance of your Insurer carrying on life insurance business. If your policy offers guaranteed benefits, then these will be clearly marked “guaranteed” in the illustration table on this page. If your policy offers variable benefits, then the illustrations on this page will show two different rates of assumed future investment returns. These assumed rates of return are not guaranteed, and they are not the upper or lower limits of what you might get back, as the value of your policy is dependent on a number of factors including actual future investment performance.”
- The Appointed Actuary and the Chief Executive Officer / Principal Officer shall approve all illustrations. Further, the benefit illustrations shall also be placed before the Board of Directors for information. Any illustration which becomes misleading following any material change of circumstances shall be discontinued forthwith.
- Insurers shall review the assumptions used in the benefit illustration during the annual actuarial valuation and revise the BI wherever required. The insurers shall file the revised the benefit illustration with the Authority within a period of fifteen days from the date of such revision.
In case of online sale:
In case of online buying of policy, the insurer has to email the final customised benefit illustration to the registered email ID of the proposer immediately after the policyholder submits the proposal form online. “The illustration should be provided to the policyholder before the payment of proposal deposit,” according to the IRDAI circular.
- The customized benefit illustration shall necessarily be generated in the prescribed format before the prospect is directed to fill up the application form and pay premium. It shall be ensured that all the terms and conditions, declarations, notes or disclosures are displayed on the main screen. No terms and conditions, declarations, notes or disclosures should be made available through an option of clicking a hyperlink.
- Specific and separate confirmation for benefit illustration shall be obtained from the proposer about understanding the benefits illustrated. There shall be provision for saving and generating a printout of the final customised Benefit Illustration by the proposer. The final customised Benefit Illustration shall be emailed to the registered email ID of the proposer immediately after his or her online submission of the proposal form and before payment of proposal deposit.
IRDAI further underlines the reason for imposing these conditions by stating: ” Considering that life insurance is essentially a long term financial instrument, a fair and transparent sales process with meaningful, timely and relevant disclosures, is very important to ensure good customer outcomes and protect the interests of insuring public.”
What is a life insurance policy illustration?
A life insurance policy illustration is a set of projections, prepared by the actuaries (professional dealing with the measurement and management of risk and uncertainty involved in policy product) of the insurance company. The illustration basically shows how your (policyholders) insurance policy will perform over a period of time. It includes financial projections for every year until the maturity. However, you must know that these set of projections are based on certain assumptions and does not guarantee how much your policy will be worth in any given particular year, except where values are clearly stated as ‘guaranteed.’
The customised benefit illustration includes insurance product’s name, policy term, benefit amount (maturity proceeds), the premium to be paid, etc. The illustration also includes policy riders if opted any.