For insurers, the solvency margin (money to be set aside for capital adequacy) for term covers has till recently been 4 per cent, the same as that for, say, the extremely-popular unit-linked insurance plans (Ulips) that sells like hot cakes. For agents, the commissions (as a percentage of premium) are very low, since premium on term covers are very low. As for investors in India, most people buy a life cover for either tax saving purposes or look at it as an insurance-cum-investment tool.

“Today, while purchasing an insurance product, the focus is more on what the buyer will get at maturity,” said financial planner Amar Pandit. At present, the Insurance Act prescribes a 40 per cent ceiling on commissions that life insurers can offer to agents. When contacted chairman of the insurance regulator IRDA, C S Rao, said, “In public interest, we are thinking of pushing for an ordinance that will do away with the cap on commissions for term covers.”

In India the regulator sees two key players that need to be incentivised — insurers and agents by making sale of term covers more lucrative for agents. Currently, state-owned LIC, the biggest player in the life insurance sector, pay 25 per cent of the premium as commission to agents for all insurance products leaving agents with little commission and thus do not ‘sell’ such products. In comparison private players like Max New York Life have tried their best to offer better commissions to agents at 35 per cent on term plans and 20 per cent on Ulips. Even then, in absolute terms, the commission on term plans is far less when compared with Ulips.

The cut in solvency margin has prompted private insurers such as Reliance Life Insurance and Kotak Life to initiate a process of revision in term plan rates. According to LIC chairman T S Vijayan term plans are already available at rock-bottom prices and hence he does not expect a significant change. He, however, doesn’t support the idea of term products and thinks investment-cum-insurance products are the flavour of the season.

What is a term cover?

It is a pure protection cover that creates an asset instantly with the first premium paid. In an unfortunate event of the death of the insured, a term cover gives the family the entire sum assured. It is the sheet anchor for all life insurance needs. However, there are no maturity benefits available in such plans.