Weigh costs and benefits before consenting to insurance policy splitting
Source: Business Standard
The Insurance Regulatory and Development Authority of India (Irdai) recently issued a master circular stating that policies should only be split at the customer’s request and with their consent. No additional fees, charges, or commissions should be imposed if a policy is split without obtaining the customer’s consent.
What is splitting?
Customers can choose to purchase a single insurance policy for a certain sum assured, with a specified tenure and benefits. Alternatively, they can buy multiple policies that cumulatively provide the same coverage and have the same features. Buying several similar policies at one go is called policy splitting. While splitting is common in life insurance, it sometimes happens in health insurance as well.
“A customer who plans to buy a cover of, say, Rs 1 crore, may be advised by an agent to split it across multiple, say, four policies of Rs 25 lakh each,” says Abhishek Kumar, Sebi-registered investment advisor (RIA) and founder, SahajMoney.com.
Pitfalls of splitting
Insurers typically offer discounts on premium for purchasing a policy with a higher sum assured. “Splitting can result in losing the benefit of a larger policy, which is a better rate, with a higher discount. A customer may end up paying more for split policies,” says Kapil Mehta, co-founder, SecureNow Insurance Broker.
Sometimes, customers buy multiple traditional policies without paying heed to their payment capacity and default on paying the premium of one or two. “Customers have to pay a surrender charge in such a scenario,” says Shilpa Arora, co-founder and chief operating officer, Insurance Samadhan.
Sometimes, it can be beneficial
If a customer has multiple smaller term policies, instead of one large one, she can close down each of them gradually as her insurance needs decline.
“As their wealth grows, investors may feel overinsured and may wish to stop paying the premiums of some term policies. Splitting gives them the flexibility to continue some policies and give up others,” says Vishal Dhawan, founder and chief executive officer (CEO), Plan Ahead Wealth Advisors.
A customer may have multiple nominees and may not want them to know about the existence of each other. “In such a scenario, the customer may buy two separate policies and name one the nominee for each,” says Karthik Chakrapani, chief business officer (CBO), Pramerica Life Insurance. He adds that it is also okay to split if you want the benefits in two different forms, say, as income from one policy and as endowment from the other.
Why agents push for it
One reason for splitting is that it sometimes allows agents to earn higher commissions. Additionally, advisors encourage splitting to meet their targets. “Insurance advisors’ targets are often linked to the number of policies sold, besides premium,” says Arora.
To split or not to split?
Splitting must result in tangible benefits for the customer, otherwise it will only mean more work for them in maintaining the policy and for their nominees in getting the death benefit from multiple policies.
According to Arora, the return from a single (investment-cum-insurance) larger policy is better than from multiple split policies.
If an agent splits without informing the customer, it amounts to mis-selling, according to Irdai. “When splitting is done without the consent of the customer, they can get a refund of premium from the insurer and reapply for the product they want,” says Arora.
First Published: Sep 13 2024 | 7:36 PM IST
