Merit based exit allowed in life insurance policy

Can a consumer walk out of a life insurance policy that has a no exit clause? A policyholder recently wanted to quit his 4 year old LIC Jeevan Akshay pension plan, for which he had paid a single premium of Rs1 lakh. He is now open to a discounted refund, even though the plan document clearly mentions “no surrender value will be available under policy”. In its response to the query, and LIC statement says, LIC generally does not allow surrender of annuity plans. This is in keeping with best global practices. However, LIC takes a lenient view, selectively allowing surrender strictly on merit.

Surrenders are allowed in special cases on “humanitarian grounds”, on almost all annuity products, in case a policyholder chooses the option annuity with return of purchase price on death. For certain products, the refund is 100%; for others, it depends on surrender value factors. Insurance experts, however, advise consumers to stay covered rather than look for. Importantly time and again, they have advised consumers to examine plan documents closely before signing up. Many, though, continue to blindly sign at places marked by insurance agents in the process, overlooking the risks involved. They may then blame agents for mis-selling of plans by suppressing risks.

A senior insurance official says such disputes are resolved solely on the basis of a policy’s terms and conditions as it is a contract between the insurer and the insured. Insurance is not purchased on a complimentary basis. If a person pays lakhs in premium without looking at the document, he cannot blame others like an insurance agent for mis-selling a product. Besides mis-selling is difficult to prove.

To avoid such an eventuality and bring in transparency in agent dealings, the Insurance Regulatory Authority of India (IRDA) has proposed a system wherein the insurance companies must list out in writing the benefits as also consequences of non-payment and lapse in case the insured person’s financial position changes. These issues must be included in both the policy document and proposal form.

The IRDA has already put up frequently asked questions on unit-linked insurance products (ULIPS) on its websites – Since ULIPs are life insurance schemes that function like mutual funds, consumers say the returns outlook could be exaggerated, considering the market’s current bullishness.

IRDA has tried to fix this grouse by placing a 6% and 10% cap on the returns illustrated in the plans. IRDA is also considering a system where the charges and fund allocation are clear in the illustration and which will have to signed by the policyholder. This, it is hoped, will ensure the policyholder understands what he is buying. Consumers have a 15 days window to go through the document, weight pros and cons and opt out if unsatisfied.

The IRDA (Protection of Policyholders’ Interests) Regulations, 2002, say: Policyholder has the option to return the policy stating the reasons for his objection, when he shall be entitled to a refund of the premium paid, subject only to a deduction of a proportionate risk premium for the period on cover and the expenses incurred by the insurer on medical examination of the proposer and stamp duty charges. While annuity and pure term assurance policies may disallow exit, a consumer can walk out of a ULIP after three years, and expect a designated surrender value. Another Insurance company Max Life is encouraging long term policies to discourage short term behavior. It (an insurance policy) is not a mutual fund.