Personal Finance Exclusive
IRDA stops advance premium payments beyond 30 days. You may face issues!

On 12th April, LIC issued circular to all its offices stating that the advance payment of premiums facility is withdrawn. While IRDA may have good intentions for it, there will be many customers who will get adversely impacted. Did IRDA consider genuine difficulties that will arise?

The Insurance Regulatory and Development Authority (IRDA) has banned life insurance companies from accepting premium under linked as well as non-linked products for more than 30 days in advance to prevent money laundering. Life Insurance Corporation of India (LIC), in a circular dated 12 April 2013, states that the premium due may be accepted 30 days before the due date of payment of premium. In case you have opted for monthly premium payment mode, you will now be allowed to pay only three months’ premium in advance on the date of commencement of the policy.


According to Mr. Prashant Tripathy, chief financial officer, Max Life Insurance, “At Max Life Insurance we have some specific steps in place to ensure that we do not hold on to customer money, paid in advance. As per our current process, we refund advance premium if it is paid three months in advance (for all modes). We are conceptually aligned to the recommendation of not accepting advance premium. The time-frame of one month for yearly premium modes and three premiums in advance for policies with monthly mode premium payment options is also apt.” But, it means not all companies have implemented the 30-day rule yet, even if they agree to it. If the 30 day rule was really good then all insurance companies would have jumped for it.


Until now, a policyholder could make a lump-sum payment of premium before the due date and even get a nominal discount on it. IRDA may have reasons like preventing mis-selling to come up with this rule as agents may be enticing policyholders to avail the premium discount by paying premiums in advance. In fact, LIC, for its traditional policies, allows premium payments five years in advance. IRDA may want to promote a regular savings habit.


While IRDA’s intentions may be genuine, the move will adversely impact several groups of policyholders. It is unclear if IRDA has given a thought to the problems that can arise. The change may even be termed as anti-consumer by many policyholders and agents based on the grievances that can arise. IRDA should have allowed three to six months of advance premium payment without any discount. Here’s why.


Some of the issues that will soon come up:


  • Companies ask salaried employees to submit proof of 80C investment by 31st January every year. If the life insurance policy premium for the employee is due in March, how will the employee submit the proof as the insurance company will not accept premium payment in January due to the 30-day restriction? Most of the insurance policies are usually sold in the month of March due to the looming deadline of financial year end. If so, there will be lakhs of salaried employees who will not be able to comply with company rules. Will the corporates change their rules to accommodate employees unable to show 80C proof by January end?


Mr Tripathy, says, “This we understand is a concern but customers while filing I-T returns can ask for a refund for any excess tax paid.” Asking for refund for any excess tax paid is tedious process that will arise if companies stick to 31st January deadline for 80C proof and the employee cannot give it as renewal is due in March.


  • On 6 December 2004, LIC had come up with a circular which states, “We have been receiving requests especially from the deference personnel to allow acceptance of premium under their policies by November, so as to enable them to obtain the tax rebate at source. If the premium is paid after November, tax rebate at source is not available and refund has to be obtained from the Income-Tax Department.


In order to facilitate availability of tax rebate at source, it has been decided to allow acceptance of premium up to six months in advance and the premium receipt is issued across the counter. However, no discount would be allowed on such advance premium payment and the advance payment option shall be allowed only within the same financial year.”


It is clear that the defence personnel will face issues now that premiums will be accepted only 30 days in advance of the due date. Allowing premium payment up to six months in advance with no discount was put by LIC for a specific purpose.

  • Many policyholders have fluctuating income. They may have money on hand that can pay future premiums, but if they are not allowed to pay the premium the money may end up being spent on non-financial things or go in other financial investments. When the actual premium due date comes, they may not have readily available funds to make the premium payment.
  • The new ULIP does not have a ‘cover continuance’ feature. There is no concept of revival of new ULIP. If you are not able to make premium payment, the policy will go in a discontinued mode and the funds will earn a pathetic savings interest rate. If five policy years are completed, then the corpus is returned back to you. A person with a fluctuating income will be refused to make advance premium payment when money is available and will fall in the trap if the money is not ready at the time of premium renewal. The policy may get discontinued at a wrong time when the fund value is low due to market conditions.


  • Policyholders leave India for a few years and may not want the hassle of remembering to pay premium within 30 days of the due date. It is much easier to make premium payments in advance and forget about the issues that can arise if you are unable to make the payment on the due date. The convenience of premium payment is completely lost with the new rule. Sure, online payments can be done from anywhere in the world, but many policyholders would rather pay by cheque. They want to ensure that payment is properly applied to the policy and no obligation outstanding.


Many policies have small amount of annual premium (less than Rs1,000). It is just easy to make future premium payments and forget about it rather than to remember such small commitments. Can IRDA help these customers?




4 years ago


Emerging Voice

4 years ago

This is good initiative. Many of us who use internet banking will benefit as we schedule payments for different dates. Why pay in advacnce when one has grace period upto 30 days for different payment ter ms.


4 years ago



4 years ago

Another hare-brained idea from IRDA.
Why cant the policyholder pay his premium in advance when he has the funds available with him?
Why should he wait till the premium due date?(or 30 days before)
It's all about convenience.
How does limiting a premium payment to 30 days prevent money laundering?

Kirit Nagda

4 years ago

IRDA Should allow at least for One Year advance Premium. All are not Punctual including agents and Clients.

Kirit Nagda
Insurance Agent


Dipen Shah

In Reply to Kirit Nagda 4 years ago

You can advise your clients to park the advance premium in debt mutual funds and transfer the due premiums on regular due dates. By doing so, they would have the dual advantage of continuing policy cover and earning higher interest. In advance premium, if one would have the requirement of the money, he/she cannot withdraw the advance premium. Here they would have the benefit of flexible funds too.

Dipen Shah

4 years ago

LIC has now come up with an arrangement with LIC Nomura MF to direct transfer of premiums from LICMF Savings Plus Fund, which is a debt fund and provides 6-7 % p.a. returns to the investors. The policyholder has to provide details of his/her policies in prescribed format and LICMF will transfer the said premiums on the due date to LIC. This facility is similar to ECS, where in the policy holder has to maintain balance in his bank a/c.

However, the issue of showing payment proof in month of November for policy due in March would remain there. The employers should consider the fact that payments may be made in March on time and should give the benefit to the employee.


4 years ago

1. The idea of IRDA thru this clause is primarily to curb money laundering and ALSO miss-selling. The regular pay policies are communicated to client as single pay and premium of next 3-5 years is collected in one shot. This gives a false impression to client of the product being single premium low cost.
2. For tax benefit, most of the companies consider payments made till Nov-jan and on the basis of last year premium receipt accept that the person shall make further payment in his policy and thus extend tax benefits. It happens every year with thousands of my customers.
3. people going outside india may very well choose auto debit mode through which they dont need to remember the premium dates. If they leave the amount in their account, premium shall get debited when due.
4. It is a rule of insurance that one should take liability of only those premiums which can be fulfilled by your regular income. In case of fluctuating income, it is always suggested to go for single premium products. This is precisely one of the reasons due to which IRDA wants to restrict advance payments so that customers buy suitable products as per their earning schedule and not as per the agent's wishes.


Deepak Shenoy

In Reply to pawan 4 years ago

Great points Pawan and I agree with all the above. Curbing of mis-selling is very very important - more than the minor difficulties that people will face.

In addition, if people want to go abroad but still pay by cheque, they can provide post-dated cheques that meet the 30 day criteria? This applies for those 1000 rupee cheques as well.

I have worked in organizations where they honour 80C insurance payments if you show last year's receipt (for payments to be done in Feb-Mar)

The problem really is the mis-selling, but it doesn't seem like these mis-sellers are being arrested and being charged for fraud, or that LIC (or IRDA) is actively banning them from any further insurance activity for at least 10 years. That is really the best deterrent - tweaking laws is one thing, but can we punish offenders too?

Bharat Petroleum confident that OMCs will be fully compensated

With recent declines in oil prices, subsidy concerns have eased for FY14. Bharat Petroleum thinks that the government will keep allowing the monthly diesel price hike, and did not seem much concerned about no diesel price hike this month, said Nomura in its note on the company

Nomura Equity Research met the management of Bharat Petroleum Corporation (BPCL) on 25 April 2013. On the key question of subsidy share for FY13, the management said there is still no clarity. But it sounded confident that oil marketing companies (OMCs) would be fully compensated. With recent declines in oil prices, subsidy concerns have eased for FY14. The company thinks that the government will keep allowing the monthly diesel price hike, and did not seem much concerned about no diesel price hike this month. The company remains optimistic on E&P, and thinks that, with the recent ongoing stake sale in offshore Area-1, valuation could go up further. These observations were made by Nomura Equity Research in its analysis of the meeting with BPCL’s management.
The brokerage maintains its preference for OMCs versus upstream oil PSUs. “Among OMCs, BPCL remains our preferred pick primarily due to its exposure to Mozambique’s Area-1 block, where we think news flow is likely to continue to be positive”, according to Nomura.
Key takeaways of the meeting with the BPCL management
Diesel – No hike yet in April, but management optimistic: In January 2013, the government had allowed OMCs to take minor 45-50paise/litre hike on a monthly basis “until further orders”. Even as the order is not revoked, the oil companies have not taken any price hike this month. “We think the government is still micro-managing the price increases. With recent declines in oil prices, and resultant declines in under-recoveries, management did not seem unduly concerned on no hikes this month, and expected that price hikes would be taken soon.” Nomura believes the next price hike will be taken only after the ongoing Parliament session ends (10th May). Also, the brokerage continues to believe that, with elections approaching, the risk remains high that the government may stop further price hike increases after a few months.
Under-recoveries situation easing: With recent declines in oil prices and incremental steps like monthly diesel price increases, non-subsidised bulk diesel sales, and direct subsidy transfer on LPG, etc, the subsidy situation has eased. Nomura said the company’s management sounded optimistic that as the direct transfer of benefits commences soon, the under-recovery on LPG and kerosene would also reduce gradually over 3-4 years. The brokerage also thinks that with the peak of Rs1.6 trillion in FY13, the worst of fuel under-recoveries is behind us.
FY13 subsidy sharing – No clarity yet, management optimistic: According to Nomura, the BPCL management stated that its objective is to secure full compensation (from government/upstream PSUs) for its FY13F under-recoveries. The management also indicated that, with current reduced overall under-recoveries, the government’s capacity to shell out higher subsidy (from FY14 budget) has increased.
To be in profit for FY13F, Nomura believes OMCs need at least 100% compensation. They need further support of Rs612 billion (Rs366 billion for 4QFY13F + unpaid Rs246 billion for the April-December period of FY13), based on Nomura’s estimates. For 4QFY13F, it is assumed that OMCs will get Rs151 billion from upstream and Rs461 billion from the government of India (GoI).
However, the brokerage opines that the risk is high that GoI support will be far less. If government support is only Rs250 billion (similar to 3Q12), the upstream burden may be far higher at Rs362 billion, and upstream PSUs may report losses for 4Q. If OMCs receive less than 100% support, they could report full-year losses for the first time, says Nomura.
Debt levels have reduced recently: The BPCL management said that it has already received compensation announced by the government for the first nine months of FY13 (Rs550 billion for three OMCs and Rs132.3 billion for BPCL) in full. Due to this, total debt has reduced to Rs220 billion (from Rs310 billion as of December 2012). BPCL currently holds bonds worth Rs50 billion.
Kochi expansion: The management stated that work has commenced on the Kochi refinery expansion (capacity to increase from current 9.5 million tonnes (mt) to 15 mt at a capex of Rs200 billion). The expansion is expected to be completed in 2016-17.
Bina refinery: Bina refinery is currently operating at around 110% capacity utilisation and the management expects break-even of Bina refinery to take place in FY14.
E&P – total investment now of $1 billion: Total equity investment of BPCL in its 100%-owned E&P arm Bharat Petro-resources (BPRL) is Rs25 billion. With total borrowing of around Rs28 billion, total investments by BPRL are now close to Rs52 billion. BPCL indicated that for any further investment in Mozambique, the money could be easily raised by BPRL, and BPCL would not need to make any significant further investment.
Mozambique – Sounds optimistic: With further discoveries in Mozambique, the BPCL management sounded optimistic on its prospects in Mozambique. It indicated that the operator is looking initially develop two 5mmtpa LNG trains, and targeting final investment decision by end this year. The talks are ongoing for initial agreements with prospective LNG purchasers. The discussions are also continuing with ENI (operator of offshore area -4 north of offshore area -1) on possible unitisation and joint development of resources.
The management reiterated that BPCL is a long-term player in the Mozambique asset and is not even thinking of divesting its 10% interest. It thinks that the valuation for the ongoing stake sale (Videocon and Anadarko selling 10% stake) could exceed the Cove Energy stake sale transaction ($1.7 billion for 8.5% stake). Recent media reports have indicated that the likely valuation of a 20% stake sale has now increased to $8-$10 billion (from $5 billion earlier) (source: The Economic Times, 20 April 2013: “Videocon hopes to increase valuation of its 10% stake in a gas-rich block in Mozambique”).


The tricky move to decide gas pricing and supplies

In order to maintain and support agriculture, it is imperative that gas is made available to this industry, thus reducing its subsidy for urea. However, such a move will correspondingly affect other consumers such as power generators, which will have a rippling effect on industry and trade. So, the question is how, when, why and who will finally decide the price structure for the gas?

Only a couple of weeks ago, Reliance Industries (RIL) announced the discovery of gas in a new find in an area identified as MJ1 in the D-6 block, where exploratory activities started some eight weeks ago, after a 15-month lull.


Further tests are underway but it is generally believed, on the initial assessment, that MJ1 may hold significant amount of gas. It has been further reported, as mentioned in these very columns of Moneylife that should all the four satellite fields discovered in D-6 area go on stream, Reliance can produce an estimated 30 million metric standard cubic metres per day (mmscmd) additionally. () No doubt, this increased production will bring a great relief to the power-starved country.


Naturally, these procedures will take a few months to achieve a production commencement status, after commercial viability tests are proved to be positive.


However, new contracts for gas supplies to commence from 1 April 2014 are to be finalized in terms of price, quantity and delivery. The domestic gas is currently priced at $4.2 per million metric British thermal unit (mmBtu).


The Rangarajan Committee had called for freeing of gas pricing which would have pegged it between $8 and $8.50 per mmBtu. To start with, this is double of what is being charged today.


Unfortunately, however, for RIL, the finance ministry does not see eye to eye with the Rangarajan Committee’s recommendations. It has, in fact, rejected the pricing formula proposed by the Committee and has instead suggested an alternative formula based on wellhead prices, charged by suppliers from Oman, Qatar, Abu Dhabi and Malaysia for long-term contracts. Wellhead prices do not take into account the transportation costs, which are substantial.


Currently, the international price for gas is $12.5 per mmBtu as against what Reliance charges at $4.2 per mmBtu.


It may be recalled, recently, apparently after the gas discovery in D-6 and to ensure that a ‘fair’ price is fixed for the new contracts from April 2014, both Mukesh Ambani and Bob Dudley of BP, had called on the prime minister, deputy chairman of the Planning Commission, Montek Singh Ahluwalia and the petroleum secretary to impress upon them the urgent need to fix realistic prices.


The fertilizer industry is also up in arms, demanding its right to have full access to gas produced in the country. In fact, India has not made any new investment in this sector for establishing new units or for expanding the existing ones because of non-availability of guaranteed supplies of the feeder stock.


India's requirement of urea is around 30 million tonnes, out of which, 8 million tonnes are imported every year, with the last year's import cost @ Rs24,564 per tonne. Based on the mix of both imported and domestic gas, the cost of production of urea is Rs11,000 per tonne with the government subsidizing supplies to farmers by Rs5,640 per tonne. Why can’t the government review the issue of fertilizer subsidy and let the market conditions dictate the price level? Farmers do not pay taxes and profits are made by the intermediaries on which there is very little control?


Based on the present production capacity, our urea industry requires 7 mmscmd of gas. The fertilizer industry has demanded that indigenous gas be supplied rather than being forced to depend upon the use of more expensive method of LNG imports.


The government has a difficult choice to make. In order to maintain and support agriculture, it is imperative that gas is made available to this industry, thus reducing its subsidy for urea. Such a move will correspondingly affect other consumers, such as power generators, which will have a rippling effect on industry and trade.


So, the question is how, when, why and who will finally decide the price structure for the gas that may be available for supplies from April 2014 onwards?  If it is purely based on domestic supplies only, and not taking into account any international gas price formula, it will establish a precedent on self-pricing policy based on local conditions. Also, it is incorrect to price it on well-head because, transportation costs are unavoidable.


Since gas will be supplied mostly through pipelines, a cost effective method has to be devised. Why not ask the fertilizer industry to join and form a consortium of sorts with the producer, pipe producer, layer (contractor) to an agreed hub point that may be nominated by Reliance (or another gas explorer like ONGC/Cairn) and amortise the expense involved?


National progress is more important than the individual corporate body making substantial profits? The final price should be in line with the replacement cost of the gas, which includes transportation and landing expenses that the importer would incur, if indigenous gas was not available?


(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)


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