The Insurance Regulatory and Development Authority (IRDA) has stepped further in order to curb mis-selling by agents. It plans to cap the charges on all traditional life insurance policies.

The IRDA may cap the surrender charges in the traditional non-linked plans from the fourth year onwards. The charges can be maximum 10% of the fund value, declining progressively every year. Traditional policies are those where insurance forms a major component of the premium and the investments are governed by the Insurance Act and not decided by the policyholder, as in the case of ULIPs.

“In three years, an insurance company typically recovers all costs and during this period the surrender charges can go up to 100%. Between the fourth and the 15th year, the surrender charges can go up to 70%. It is unfair to levy such high charges even after recovering all costs during the first three years. Therefore, IRDA plans to cap the charges fourth year onwards,” said S.B.Mathur, the Secretary of Life Insurance Council. He is also of the view that anything done to the traditional policies would affect the government’s borrowing as two-thirds of the money collected in traditional policies goes back to the government in some form or other. “If Irda wants to stop insurers from charging absurd amounts, why can’t it stop such products at the approval stage?”, he said.

We believe that if such an initiative is taken by IRDA, for traditional insurance policies, it would benefit the policyholders, as they would receive almost the entire amount back even if they withdraw from the policy before maturity. Moreover it would enable to keep a check on the mis-selling done by insurance agents.