Kathmandu. Some of the insurance plans introduced by life insurance companies have also provided the facility of paying the entire insurance premium in one lump sum for the benefit of the insured. The insurance policy with this facility is known as a single premium insurance policy.
In a single premium policy, the insured does not have to pay the premium every year during the term of the policy. At the time of purchasing the policy, it is enough to pay all the insurance premiums in one lump sum. The rest of the period is free of insurance and the insurer has to bear the responsibility of providing liabilities and facilities as per the terms and conditions of the policy during the term of the policy.
Here is the situation of profit for both the insured and the insured, the insured does not have to remember the date of payment of the premium for the rest of the period. There is no need to worry about the insurance policy lapse if the premium is not paid on time. You do not have to bear the stress of being deprived of any insurance benefits due to expired insurance policy. On the other hand, even for the insured, there is no worry about the insurance policy being expired without paying the premium for 15 years and the expense rate will increase. There is an opportunity to invest in areas with long-term returns by securing future insurance income upfront. Unlike an insurance policy that pays a regular installment, there is no need to bear a big risk on a small premium.
Now let’s connect the context here with the title of this news.
In the case of insurance premiums paid in lump sum, the Government of Nepal has limited the commission rate to the agent to 6 percent. Such commission is received only once by the concerned agent. Unlike other insurance policies that are of a fixed nature, the agent does not receive commission income every year. However, in such an incentive, the insurer is providing incentives up to 18 percent of the premium in the first year itself. It is also theoretically incompatible here. The practice of the insurer bearing the risk for a period of 15 years but providing an incentive of up to 18 percent to the agent in the first year will result in a loss for the insurer, which will eventually lead to a depletion of the life insurance fund and a reduction in the bonus rate received by the insured.
According to actuaries, it is a wrong practice to distribute incentives only by looking at the first year. This will result in a large portion of the agent’s commission and incentives coming out of the insurance premium in the first year, but the risk will remain for the duration of the policy. If the insured pays a death claim or accidental death claim within one or two years of the commencement of the policy, the lump sum expense of the incentive will directly result in the loss.
High Dedication Rate
If we look at the data related to surrender of policies received from the Nepal Insurance Authority and some insurers, the surrender rate of single insurance policies is very high. In most cases, the policies are surrendered after the completion of three years of issue. The biggest loss from this is in the life insurance fund.
Some experienced agents who have been active as professional agents for a long time do not prefer to sell a single insurance policy. In terms of immediate benefits, this insurance policy is a source of good income for the insurance agent, but in the case of surrender, it is detrimental to all three parties, the agent, the insured and the insurer.
is an international practice:
According to experienced actuaries, in the international life insurance market, there is a practice of tying the income of such premiums on an annual basis only for the relevant year. Therefore, it would be appropriate for the Nepal Insurance Authority (NIA) to distribute the incentive in different years like other term insurance policies by not providing the incentive amount of a single premium in the first year itself. This will not cause any loss to the insured, the agent and the insurer.
Although the Insurance Regulations have certain restrictions on the distribution of commission of a single insurance premium, there is no clear regulatory provision regarding the distribution of incentives.
