5 major changes in life insurance policies from Jan 1, 2014 – How it affects you ?

POSTED BY Jagoinvestor ON September 30, 2013 COMMENTS (189)

Some major changes are going to happen in life insurance industry from Jan 1, 2014, especially in traditional policies like Endowment Plans, money-back plans and even ULIP’s. You will surely have a LIC policy or any other private sector traditional plans or might buy them in coming times. Here are 5 major changes which you should be aware about and they will come  into effect from Jan 1, 2014.

1. Service Tax introduced in LIC Policy Premium

Till now LIC was not charging the service tax of 3% from the customers and paying it to govt from the pool of money collected itself, but now the service tax will have to be charged separately from policy holders. Which means that if your LIC premium was Rs 50,000 per annum, now it will be 3.09% higher in first year, which is Rs 51,500  and after 1st year, it will be 1.545% as per moneylife article.

While customers see it as additional burden, note that its not the case exactly, Earlier – LIC was paying the service tax from the pool of money collected from investors only, which reduced the bonus amount given back to them. But now because it will not be taken out from the funds, that means the bonus declared each year will go up by that much margin and will come back to investors only. Note that Pvt companies were charging the service tax already, so nothing changes on their side. Only LIC was not charging it separately, which they will have to do from Jan 1, 2014 deadline.

2. Increase in Surrender Value

One of the major changes which has happened, is the change in surrender value for policy holders. The rules of surrender value depends on the premium paying term of the policy. If the premium paying term for policy is less than 10 yrs. Then the policy will acquire the surrender value after paying premium for 2 yrs (earliar it was 3 yrs), however if the premium paying tenure is more than 10 yrs , then the surrender value will be acquired only after paying 3 yrs premium.

In both the cases, the minimum surrender value would be 30% of the premiums paid without excluding the first year premium. Note that earlier, if you used to surrender after paying 3 premiums, you got 30% of premiums paid MINUS first year premium, but now as per new rules, the first year premium will not be deducted. Learn everything about LIC policies working before Oct 1

Another good change is that, from 4th-7th year, the minimum surrender value would be 50% of the premiums paid, and has to reach 90% of premiums paid in last 2 yrs of policy paying tenure.

3. Possible Decrease in Premium on LIC Policies

There is a great possibility that the premiums on LIC policies will come down by some margin, because the mortality rates will now be revised by LIC in calculating the premiums.

Mortality rates are the rates at which the insurance company deducts the fees for insuring you based on your age. LIC had been using old mortality rates till now, but now they will have to use new mortality rates . Just to give you an idea on reduction of premium, when I check the mortality rate for a 40 yrs old person in old table, its 0.001803 . But in new rates its 0.002053 . Which is approx 10% better. Lets not go into detailed calculation at the moment, but your risk premium part should go down by 10% (not the full premium, because only some part of whole premium in traditional policies are risk premium and rest is investment part) .

4. Higher Death Benefit

If the policy holder is above 45 yrs of age, then the Sum Assured has to be more than 10 times the annual premium, and for those who are less than 45 yrs old, it can be minimum 7 times the premiums. Note that for claiming the tax exemptions, your sum assured has to be 10 times the base yearly premium. So when you buy the policy in-case, you need to keep it in mind. BasuNivesh has done a great point by point notes on each aspect of regulation, in-case you want to go into details.

5. Agents’ incentives have now been linked to the premium paying term

Now agents commissions is linked to the premium paying tenure. Earlier a lot of agents used to sell the policies which had higher maturity tenure, but limited premium paying tenure (like 30 yrs policy with 10 yrs premium payment) . Here is the new commission structure taken from Moneylife article 

In case of regular premium insurance policies, a policy with a premium paying term (PPT) of five years will not pay more than 15% in the first year. Products with PPT of 12 years or more will have first year commissions up to 35% in case the company has completed 10 years of existence and 40% for the company in business for less than 10 years.

The funny aspect is that a lot of LIC agents tried to mislead many new investors by projecting date Jan 1, as the deadline when a lot of LIC products will stop giving good features using the official notification. LiveMint has even captured it in this image.

misleading ads by LIC agents

What should you do ?

The insurers have to refile all their products to IRDA and already lots of products have been approved and many are still waiting for approvals. So if you have a insurance policy, then you will get the communication from your insurer about any changes if any. Right now, for sure the traditional plans have got better, compared to their past avatars.

If you are adamant on buying endowment plan, better wait for some time and let things get more clear. Let me know about your thoughts on this change ?

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189 replies on this article “5 major changes in life insurance policies from Jan 1, 2014 – How it affects you ?”

  1. SIVAKUMAR says:

    Sir,
    I invested single premium of Rs 160000/- in Reliance Life Insurane with market linked plan named Automatic Investment plan during 2008. This year 2016 I fore closed and got a Total refund of only Rs 185000/-. the Ins company deducted Rs 1854/- under sec 194DA. My tax slab is 30%. Sum assured Rs 2 Lakhs.. Kindly workout the balance to be paid? I have not availed any tax benefit while investing. Also reply whether it comes under Long term capital gain tax?

    1. Hi Sivakumar, we will be happy to answer a query related to product. This query you asked requires a calculation and dedicated time. We do not have that much bandwidth .

  2. Shashank says:

    Can I reduce the tenure of Jeevan Saral Policy. I started that in 2009 and the agent cheated by making the tenure as 35 years. Can I reduce the premium payment term to 20 years?

    1. I dont think there is any option to reduce the term as such !

  3. HARSHAVARDHANA says:

    I am paying Rs.4798/- per month towards “LIC new retire and enjoy policy”.
    Premium paying term is 22 years (started from Aug-2013). Sum assured is Rs.16,50,000/-
    Now another 3 months are left to complete 3 years (Rs.4,798*36=1,72,728 Rs). I will stop paying premium after 3 years.

    What will be my surrender value if I surrender after 3 years or till what period if I wait so that i can get maximum of premium paid? Please compare to your article above point no 2.

    Whatever the surrender amount i receive, where i can invest the same to recover 1,72,728 – surrender amount.

    1. Hi HARSHAVARDHANA

      The best answer you can get only from the agent you invested through or just contact the company. The thing is your case is a bit personalised and other than company, no one can give accurate information

      Manish

  4. aceleo26 says:

    hi manish,
    would like to surrender (3 years premium already paid) endowment lic policy which i bought of term X 20 yrs . premium of 25K/year. want to take a good one single policy with term insurance and invest the rest.
    please advise shall i stick to it , convert to paid up or surrender ? according to the new regulations coming up

    1. Yes, you should surrender it now .. and better take a term plan.

  5. Mohit says:

    Dear manish i have taken new jeevan anand lic policy last year this year i paid around 73844 my actual premium is 72529 so the service tax is around 1315rs my question is will i get rebate on 1315 rs?

    Regards,
    Mohit

    1. Vanish says:

      NO MOHIT THERE IS NO TAX REBATE ON SERVICE TAX……TAX IS REBATE IS ONLY ON PREIMUM WHICH YoU paid……

    2. Why ? Do you get service tax back when we eat in restaurant ? Then why here ?

  6. Nishtha says:

    Its important to know the updates and the changes our government is making in life insurance polices, because it directly affects the insurers, and which policies they have bought or will buy.I have bought Tata AIA Life’s Insurance Fortune Guarantee offers Guaranteed Maturity Benefit that varies from 138% to 159% of Total Premiums Paid and Tax benefits u/s 80C & 10(10D) of the Income-Tax Act, 1961.

    1. Hi Nishtha

      Thanks for your sharing your valuable comment on this topic. Please keep sharing your views in future also

      Manish

  7. SATHISCHANDRA says:

    I taken policy for two.lakh, I paid.a.premium of ₹ 15000 for one year.15 years back.can I get my.money back.

    1. Hi SATHISCHANDRA

      The best answer you can get only from the agent you invested through or just contact the company. The thing is your case is a bit personalised and other than company, no one can give accurate information

      Manish

  8. Gobinath says:

    Hi,

    i am taking a LIC New jeven anand plan in April 2015. i am paid monthly RS 5000.Maturity Amount is 11 Lakes (21 years). Now i am decide to reduce my Maturity amount and Monthly premium.

    Kindly Pls guide me How to Reduce my Monthly premium and Maturity amount.

    Thanks

    Gobinath

    1. Hi Gobinath

      The best answer you can get only from the agent you invested through or just contact the company. The thing is your case is a bit personalised and other than company, no one can give accurate information

      Manish

    2. koteeswaran says:

      Mr.gopinath
      Greetings!
      By taking a policy ,you enter in to a contract with insuance company and you cannot either decrease or increase your premium amount or the term of the policy. What you can alter is your mode of payment that too only from lower frequency to higher frequency. That is you can change your mode of premium from mly to qly/hly/yly, qly to hly/yly, hly to yearly. You are allowed to change the nominee. As for as i know only these chan