LIFE INSURANCE: ENDOWMENT POLICY

 Policy Term: Premium Paying Term: Commission

The previous time, we talked about how changes to the IRDA regulations had impacted bonus entitlements, and minimum death benefits with exclusions.

Definition once again
Endowment insurance plans are made to pay out a large payment in the event of death, as well as survival, maturity, and profit sharing, if necessary.

Policy term
Endowment insurance plans are made to pay out a large payment in the event of death, as well as survival, maturity, and profit sharing, if necessary.

Premium paying term
The Premium Paying Period is the period of time that the policyholder must pay premiums to keep the contract in force. The typical premium payment period is the same length as the insurance term. Yet, some insurance contracts give the insured the option to choose a timeframe for paying premiums that is less time than the policy term. The policy term must be equal to the policy term or less. Under no circumstances may the Insurance Term 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:- 
  • The minimum policy term cannot be less than 5 years.
  • The minimum premium paying term for all policies other than single premium policies is 5 years mandatorily. The sole exemption is for single premium insurance, which is required to collect all premiums at once.
There are no limitations on the flexibility that can be offered in Limited Premium Paying Terms in 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 has a solid justification. The Insurance Act states that a commission on a single-premium insurance policy cannot be greater than 2%. It is clear that this percentage is too low to pique distributors' interest. For insurance with recurrent premiums, the Act also enables a commission rate that is significantly higher. Since certain businesses were issuing single premium plans that were conceptually perceived as non-single premiums, a higher rate of the commission may be paid out. As a result, the Insurance Act was violated.

A percentage of the premiums paid was used to calculate commissions. Prior to this time, no defined criteria were tied to commissions. The recommended maximum rates were mostly followed. In accordance with the new laws, IRDA has tied the commission rate to the duration during which premiums are paid, in an effort to promote the sale of longer-term plans. As mentioned earlier, the commission will be a percentage of the premium paid; as a general rule, the percentage is calculated as three times the term for which the premium is being paid, with the exception of single premium policies, which continue to be subject to a commission rate of 2% of the premium. The commissions that will be paid in the following years won't alter. The differences between conditions for brokers and new insurance businesses are minor. There are different rates for pension products and we shall consider them separately.

Before making a purchase decision, every consumer should fully research any insurance policy and compare all insurance plans offered by various insurance firms. 

“It’s not only about how much insurance you need but it’s all about how much your family needs in your absence and how much you need to fulfill your future dreams.”

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