ET Explainer: An act of commission?
commissions offered for the former suite of products. Term insurance offers pure life cover without maturity, savings, or investment components, leading to lower premiums and commissions.
New regulations permit insurance companies to determine commissions based on board-approved policies, but they must not exceed overall expenses of management (EoM) limits, calculated as a percentage of premiums.
ET explains the mathematics behind the preference for banks and insurance agents for selling endowment policies.
The primary reason: Higher commissions.
These commissions are typically a percentage of the premium paid by policyholders, making endowment policies more financially attractive for agents and banks. Term insurance, also known as pure protection plans, is different from other life insurance products.
Term insurance provides financial protection to the policyholder's beneficiaries in the event of the policyholder's demise. Unlike traditional policies, term insurance solely provides life cover.
It does not promise maturity benefits, survival benefits, and investment components. As a result, term plans have lower premium rates, which results in lower commissions for those selling them.
What percentage of premiums can be allocated to EoM?
The IRDAI (Insurance Regulatory and Development Authority of India) has set specific EoM limits.
For insurers, the EoM expenses should not exceed 30% of the premium collected during a financial year.
How will the new regulations affect the payment of commissions to insurance agents?
Starting April 1, insurance companies have the flexibility to pay commissions to agents based on their internally approved policies. However, there is a regulatory limit called the «overall EoM ceiling».
