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ET Explains: Why banks & agents prefer selling traditional savings insurance products over term insurance

Banks and insurance agents are seen promoting endowment policies over term policies due to the higher commissions offered. Term insurance offers pure life cover without maturity, savings, or investment components, leading to lower premiums and commissions.

New regulations permit insurance companies to determine commissions based on board-approved policies, but they must not exceed overall expenses of management (EoM) limits, calculated as a percentage of premiums. Here we try to explain why term insurance is less preferred over traditional savings insurance products by banks and agents-

Why do banks and insurance agents often promote endowment policies over term policies?

Banks and insurance agents often favour endowment policies over term policies because endowment plans offer them higher commissions. These commissions are typically a percentage of the premium paid by policyholders, making endowment policies more financially attractive for agents and banks.

Term insurance, also known as pure protection plans, is different from other life insurance products. Term insurance provides financial protection to the policyholder’s beneficiaries in the event of the policyholder’s demise. Unlike traditional policies, term insurance solely provides life cover. It does not promise maturity benefits, survival benefits, and investment components. As a result, term plans have lower premium rates, which results in lower commissions for those selling them.

What percentage of premiums can be allocated to expenses of management (EoM) according to IRDAI guidelines?

The IRDAI (Insurance Regulatory and Development Authority of India) has set specific EoM limits. For insurers, the EoM expenses should not exceed 30% of premium collected in during a financial year.

How will the new regulations affect the payment of commissions to insurance agents?

Starting from April 1, insurance companies have got the flexibility in paying commissions to agents based on their internally approved policies. However, there is a regulatory limit called the “overall expenses of management (EoM) ceiling.” This ceiling is set to ensure that only a percentage of premiums collected is paid to cover commissions and other operational expenses. Insurers have to adhere to this EoM ceiling when paying commissions.

Why is higher commission often associated with the mis-selling of life insurance products?

Insurers pay commissions to agents within the range of 15% to 40% of the first-year premium for regular paying policies. The specific percentage within this range depends on the premium paying term. Higher commissions are a key reason for the mis-selling of life insurance products. Agents are likely to sell unsuitable products to earn higher commissions, especially to individuals looking for last-minute tax-saving investments or to customers who may not be financially savvy.Once sold, agents sometimes tend to encourage customers to churn policies in the initial years to earn higher first-year commissions. This practice leads policyholders making decisions that may not be in their best financial interests.

How do banks contribute to individual new business for the private sector compared to the public sector insurance giant Life Insurance Corporation of India?

Banks are most sought after distribution partners for insurers. Banks generated more than half of individual new business for the private sector insurers, contributing 55% of the individual new business during the year 2021-22. In contrast, the public sector insurance giant LIC’s contribution in this category was comparatively lower at 2.63%.

Also, banks played a key role in generating group business for private insurers accounting for 21.47% of the total group new business premium among private insurers, according to IRDAI annual report. The commission expenses ratio, representing commission expenses as a percentage of premium, witnessed a slight decrease, falling from 5.25% in 2020-21 to 5.18% in 2021-22. Despite this decrease, the total commissions increased by 8.77% during the same period due to a total premium growth of 10.16%.

How many insurers were found to be compliant with expense guidelines in 2021-22?

IRDAI (Insurance Regulatory and Development Authority of India) had set EOM Regulations in 2016, defining the allowable limits for expenses of management, considering factors like the type and nature of the product, premium paying term, and the duration of the insurance business. In 2021-22, out of 24 life insurers, 16 were found to be compliant with these regulations and eight were non compliant.

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