Costlier annual money-back plan erodes life fund

Kathmandu: Annual  money-back life insurance policy has been termed as termite in the life insurance industry of Nepal. As the feature of the post is completely against the concept of endowment policy, it has been costing dearer for the life insurers selling it with high priority.

In the annual money back plan, the policyholder gets 5 percent of the sum assured annually irrespective of the annual premium, term or sum assured. As per the experts in the Insurance Board, the method of distributing commission and incentive to the agency is quite wrong in this policy.

It has been found that most of the companies have forced their policyholders to utilize the installment received against money-back to pay the annual premium. So, the policyholder needs to pay only the balance amount of annual installment and rest will be settled by the amount supposed to be distributed against annual money-back.

For example, if a policyholder buys an annual money-back endowment of 20 years term with sum assured of Rs.10 lakh. He pays Rs.75,000 annually as premium. He receives 5 percent of Rs.10 lakh from next premium paying date that amounts to Rs.50,000. Here, Rs.50,000 is adjusted to pay the annual premium and the policyholder will pay Rs.25,000 from second installment till last premium paying date.

It’s totally a risk game for the life insurers when it comes to policy surrender. As per the Life Insurance Policy Directives issued by the Insurance Board, a policyholder can surrender a policy immediately after the payment of three annual installment and completion of three years from the date of policy commencement.

Till date based on the actuarial report of life insurers, it’s been proved a business of heavy loss. Annual money-back plan was first introduced by Union Life Insurance in Nepalese market. With the adverse impact on the total portfolio of the company, it has declared poor policy bonus for the year 75/76. Similarly, some other life insures who have sold annual money-back plan with high priority are also suffering with poor policy bonus rate.

Pujan Dhungel Adhikari, director of the IB and head of the insurance policy division, said that there is no issue in the product pricing of the money back policy. “Looking at the details provided by the insurance company, there is no issue with the pricing, but the loss has been occurred over excess incentives and commission disbursed to the agency.

Insurance companies have been providing incentives in addition to commission against the sales of annual money-back policies. When calculating the insurance premium earned from a money-back policy for the incentive, a large sum of premium goes to the agent in addition to the commission.

As per the Insurance Act, an agency receives commission for the first 10 years against the sales of endowment plan. The commission ranges from 25 percent to 5 percent over the period. The agency receives 25 percent for the 1st year, 15 percent for the 2nd year and 5 from 3rd year onwards till 10th annual installment for an endowment policy with a term of 15 to 19 years. Except that, senior agency member also receive 4 percent incentives. There’s a provision that except the agency commission, 18 percent additional amount can be provided to the agency members as incentives against the first premium income.

If the annual money-back plan continue, it will surely erode the life fund of insurers whose sales profiles includes a remarkable percentage of annual money-back plan.


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