Life insurance in India
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Life Insurance is one of the fastest growing sectors in India since 2000 as Government allowed Private players and FDI up to 26% and recently Cabinet approved a proposal to increase it to 49%. In 1955, mean risk per policy of Indian and foreign life insurers amounted respectively to ₹2,950 & ₹7,859 (worth ₹15 lakh & ₹41 lakh in 2017 prices). Life Insurance in India was nationalised by incorporating Life Insurance Corporation (LIC) in 1956. All private life insurance companies at that time were taken over by LIC. In 1993, the Government of India appointed RN Malhotra Committee to lay down a road map for privatisation of the life insurance sector.
While the committee submitted its report in 1994, it took another six years before the enabling legislation was passed in the year 2000, legislation amending the Insurance Act of 1938 and legislating the Insurance Regulatory and Development Authority Act of 2000. The same year, newly appointed insurance regulator - Insurance Regulatory and Development Authority IRDA—started issuing licenses to private life insurers.
- 1 Types of Life Insurance in India
- 2 Foreign Direct Investment (FDI) Policy in Insurance Sector
- 3 Indian life insurance industry overview
- 4 External links
Types of Life Insurance in India
Life insurance products come in a variety of offerings catering to the investment needs and objectives of different kinds of investors. Following is the list of broad categories of life insurance products:
Term Insurance Policies
The basic premise of a term insurance policy is to secure the immediate needs of nominees or beneficiaries in the event of the sudden or unfortunate demise of the policy holder. The policyholder does not get any monetary benefit at the end of the policy term except for the tax benefits he or she can choose to avail of throughout the tenure of the policy. In the event of the death of the policyholder, the sum assured is paid to his or her beneficiaries. Term insurance policies are also relatively cheaper to acquire as compared to other insurance products.
Money back policies are basically an extension of endowment plans wherein the policyholder receives a fixed amount at specific intervals throughout the duration of the policy. In the event of the unfortunate death of the policyholder, the full sum assured is paid to the beneficiaries. The terms again might slightly vary from one insurance company to another.
Whole life policies
A whole life insurance plan covers the insured over his life. The primary feature of this product is that the validity of the policy is not defined so the policyholder enjoys the life cover throughout his life.
Unit-linked insurance policies again belong to the insurance-cum-investment category where one gets to enjoy the benefits of both insurance and investment. While a part of the monthly premium pay-out goes towards the insurance cover, the remaining money is invested in various types of funds that invest in debt and equity instruments. ULIP plans are more or less similar in comparison to mutual funds except for the difference that ULIPs offer the additional benefit of insurance.
Pension policies let individuals determine a fixed stream of income post retirement. This basically is a retirement planning investment scheme where the sum assured or the monthly pay-out after retirement entirely depends on the capital invested, the investment timeframe, and the age at which one wishes to retire. There are again several types of pension plans that cater to different investment needs. Now it is recognized as an insurance product and is regulated by IRDA.
Foreign Direct Investment (FDI) Policy in Insurance Sector
Seeking more investment in the insurance sector, on March 18, 2016, the government allowed FDI in domestic insurance companies up to 49%, up from 26%, without the prior approval. Earlier 26% FDI was approved through automatic route. For FDI up to 49% approval of Foreign Investment Promotion Board is required subject to the verification of insurance regularity authority of India. There are 57 insurance companies in India out of which 24 are life insurance companies and 33 are general insurance companies.
Initial Public Offer (IPO) rules for Indian Life Insurance Companies
A key piece of legislation impacting on the Life Insurance industries capital raising abilities is the lock-in period of 10 years for investment to be limited to promoter group equity investments. Under the Insurance Guidelines, Indian Life Insurance companies can opt for a public issue of equity through an Initial Public Offer (IPO) after 10 years of operations.
In October 2010, the securities market regulator, Securities and Exchange Board of India (SEBI), issued disclosure norms for Indian Life Insurance Companies seeking to make an initial public offer for sale of equity shares to the public.
Indian life insurance industry overview
All life insurance companies in India have to comply with the strict regulations laid out by the Insurance Regulatory and Development Authority of India (IRDAI).
Life Insurance Corporation of India (LIC), the state-owned behemoth, remains by far the largest player in the market. The private companies like Exide Life Insurance have come out with products called ULIPs (Unit Linked Investment Plans) which offer both life cover as well as scope for savings or investment options as the customer desires. These type of plans are subject to a minimum lock-in period of five years to prevent misuse of the significant tax benefits offered to such plans under the Income Tax Act. Comparison of such products with mutual funds would be erroneous.
Commission / intermediation fees
- The maximum commission limits as per statutory provisions are:
Agency commission for retail life insurance business:
- 7- 25% for 1st year premium if the premium paying term is more than 20 years
- 7- 10% for 1st year premium if the premium paying term is more than 15 years
- 7- 10% for 1st year premium if the premium paying term is less than 10 years
- 7% - yr 2 and 3rd year and 3.5% - thereafter for all premium paying terms.
In case of Mutual fund related - Unit-linked policies, it varies between 1.5% to 6% on the premium paid.
- Agency commission for retail pension
- 7.5% for 1st year premium and 2.5% thereafter
- Agency commission for retail pension
- Maximum broker commission - 30%
- Referral fees to banks – Max 55% for regular premium and 10% for the single premium. However, in any case, this fee cannot be more than the agency commission as filed under the product.
- However, the above commission may be further subject to the product wise limits specified by IRDA while approving the product.