Think of this situation; you bought an insurance policy and then a month later you find that it’s not what you thought it would be or wanted. The reasons could be many, maybe the terms were unclear or you were misled into buying it.
According to the existing regulation, as enforced by the Insurance Regulatory and Development Authority of India (Irdai), a policyholder has a ‘free look period’ of one month to cancel and get a refund against their newly bought insurance policy.
However, this could change soon. A report by CNBC-TV18 states that Finance Minister Nirmala Sitharaman has asked insurance companies to increase the free look period from the existing one-month period to ‘one year’. If brought into regulation, this could give policyholders more time to asses their policies and make better-informed decisions.
What Did the Finance Minister Say?
On February 17, Finance Minister Nirmala Sitharaman announced that the government has asked insurance companies to extend the free look period from the current one month to one year. The move is aimed at protecting policyholders from mis-selling and ensuring they have ample time to review their insurance agreements.
Speaking about broader insurance sector reforms, the FM also stated that internal consultations on the Insurance Amendment Bill have been completed. However, before these changes come into effect, legal amendments will be required.
Additionally, the minister said that the government is looking at the entry of more players in the insurance market. This follows the announcement of a 100 per cent hike in Foreign Direct Investment (FDI) in the insurance sector.
What Exactly Is the Free Look Period?
For those unfamiliar, the free look period is a safeguard for insurance buyers. It gives them the option to review the policy terms after purchase and cancel it without financial penalties if they find discrepancies or if the policy does not meet their needs.
Currently, policyholders get at least 15 days to cancel a policy. This extends to 30 days in cases where the policy was purchased electronically or through distance mode. The free look period applies to all life insurance policies and some long-term health insurance plans (minimum tenure of three years).
To cancel a policy during this window, policyholders must submit a written request, detailing their reason for cancellation and other relevant information. Once the request is made, the insurance provider may reach out to understand the concerns and offer potential solutions before processing the refund.
How will an extended free look period benefit policyholders?
If this proposal is implemented, the extension from one month to one year will have significant benefits for insurance buyers. This will give them;
More time to access the policies: Many policyholders realise later that their policy terms don’t match what was promised (or needed by them). A longer period will give them time to carefully review and compare options before committing long-term.
Protection against mis-selling: The insurance industry has long since faced the common problem of ‘mis-selling’. Insurance agents or bank relationship managers sometimes mislead customers about benefits, exclusions, and returns from insurance plans which leads to financial setbacks for policyholders. A one-year free look period will act as their safety net.
Financial Protection: Many policyholders who discover later on that their policy is not a good fit for them will be able to opt out without suffering huge losses later on.
What Happens When You Cancel During Free Look Period?
If a policyholder chooses to cancel their policy within the free look period, they are entitled to a refund of their premium (paid till the cancellation date). However, it is important to verify and check what charges insurers are going to deduct from this refund. For instance, they may deduct certain charges, such as;
Medical Examination costs
Stamp Duty charges
A proportionate risk premium for the period the policy was active
When it comes to unit-linked insurance policies (ULIPs), the insurance companies typically repurchase the units at the prevailing market rate on the date of return.
While the report quotes the Finance Minister asking insurers to increase the free-look period, the extension has not been announced by Irdai yet. This means that this is still a proposal and not a regulatory measure (or rule).
However, if implemented, this could be a game-changer for insurance buyers in India, giving them a much-needed safety net.
