Insurance
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On 12th April, LIC issued circular to all its offices stating that the advance payment of premiums facility is withdrawn.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?

User

COMMENTS

ABHA CHAWLA MOHANTY

3 years ago

IRDA POLICY MAKING APPEARS IN CONSONANCE WITH SPAN OF MANAGEMENT,,,,!?TOUCHE'

Emerging Voice

3 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.

PRABHAT

3 years ago

PERSONS WANT TO PAY PREM. IN ADVANCE , FOR THEIR PERSONAL REASON SHALL KEEP THAT MONEY IN THEIR SAVINGS A/C AND GIVE MANDATE TO INSURANCE CO. TO COLLECT PREM. FROM HIS BANK AND TILL THEN BANK WILL PAY S B INTT. FOR THE BALANCE IN THE A/C. NO BOTHERATIO FOR CUSTOMER .

DEEPAK KHEMANI

3 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

3 years ago

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

Kirit Nagda
Insurance Agent

REPLY

Dipen Shah

In Reply to Kirit Nagda 3 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

3 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.

pawan

3 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.

REPLY

Deepak Shenoy

In Reply to pawan 3 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?

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