Q.1-10.Read the following passage carefully and answer
the questions given below it. Certain words have been printed in bold to
help you locate them while answering some questions.
While the market-linked plans of insurance
companies were refurbished long ago, traditional plans, which offer
assured returns, continued to have features that were loaded against the
investors. The Insurance Regulatory and Development Authority (IRDA) has tried
to address this by coming up with a new set of regulations for traditional
plans. The deadline for insurers to comply with these rules passed on New
Year’s Day. Most insurers have re-launched their old products in the last two
weeks based on the regulator’s mandate. But traditional insurance plans are
still far from a mouth-watering proposition for investors. Yes, you may be
shelling out less to the agent and getting a higher surrender value if you hop
off midway. But despite these changes, these plans remain high-cost
investments. The new guideline has improved the surrender value under
traditional insurance policies. Now on, the first year premium paid will also
be counted in surrender value calculation, and, policies of term less than ten
years, will acquire surrender value after the second year itself. It also limits
agent commissions both on long term and short term policies. It has been
mandated that revenues from online sales and through other direct channels,
will have no commissions and that the benefit here will have to be passed on to
the customer. There are also stipulations on minimum sum assured under a
policy, reinforcing the point that these products are essentially insurance
policies.
For
traditional plans such as endowment and money back policies, around 35 per cent
of your first year premium (on policies where premium payment term is 12 years
or more) will now flow to the agent. Compared to Unit-Linked Plans which pay
5-12 per cent of the premium in the first year as agent commission, the charges
in traditional plans still look excessive. Commissions need to be trimmed
further to improve effective returns meaningfully. Also, there is no cap on
total charges under a traditional plan unlike in ULIPs. In unit-linked plans,
the investor can be sure that the insurer will not take away more than 2.25 per
cent of returns, as this is maximum allowed difference between gross and net
yield under the regulation. The best of traditional products even now may give
you just 5-6 per cent returns, with outer limits depending on bonus
declaration. If an agent tells you that lock-in requirements on traditional
polices have been relaxed, don’t fall for it. Surrendering a traditional plan
in its initial years will still be a costly affair. Earlier, the surrender
value amounted to 30 per cent of the premiums paid till date, excluding the
first year premium. Now it is 30 per cent of total premiums paid. For example,
if you paid Rs 1 lakh for three years, your surrender value in the fourth year
will be Rs 90,000 now against Rs 60,000 earlier.
A
policy of term less than 10 years will acquire surrender value after the second
year and one of policy term over 10 years, will acquire surrender value after
when three year premiums have been paid. IRDA has also asked insurers to ensure
higher sum assured under traditional insurance plans. For a 45-year-old person,
the minimum sum assured now has to be 10 times the annual premium and for
someone above this age, the minimum sum assured has to be seven times the
premium. Now, though this ensures a higher risk cover, the costs attached are
also high.
A
traditional plan, does not disclose where it invests your premiums. Most of the
money goes into debt investments with an allocation to equity, but investors
would not have any disclosures about the investments until maturity. This is
likely to keep investors in the dark about returns until the maturity. Unlike
unit-linked plans , traditional plans also don’t offer monthly declaration of
NAV or fund value. The new regulation has not done anything to correct this lacuna
in traditional plans. All you would get is a benefits illustration assuming
gross returns of 4 per cent and 8 per cent. As mentioned earlier, mixing
insurance with investment is a bad idea.
The
best option for investors across board is to take a term policy to cover all
risks and a medical cover. Select unit linked plans can be looked at if their
charges are low and if they have a good track record, with a modest risk
profile. While traditional plans may have worked in an environment of low
inflation, they may not make the cut in a high-inflation, high-interest rate
scenario.
Q.1. Which
of the following is/are characteristics of insurance plans based on the new
guidelines?
(A) Minimum sum assured under a given policy would
be limited.
(B) The commission received by the agents would
remain limited.
(C) First year premium would be added to the
surrender value increasing it eventually.
(D) Commission would not be given on online sale
which would benefit the customer indirectly
(1)
Only C (2) Only B and C (3) Only C and D (4) All except B (5) All of
the above
Q.2. If
someone has bought an insurance policy of a maturity period of 12 years, the
earliest time when the insured can surrender a policy would be-
(1) In the second year (2) After 12 years (3) After 3 years
(4)
After 6 years (5)
After 2 years
Q.3. Which
of the following is FALSE in the context of the passage?
(1)
The new guidelines were to come into
effect from the first day of this year.
(2)
Market-linked plans of insurance
companies were revised recently.
(3)
The investment plans is not revealed if
a traditional policy is bought.
(4)
The sum assured has to be higher in case
of traditional policies.
(5)
All of the above
Q.4. Why
has it been proposed to bring down the commission further, on insurance policies?
(1)
So that the customers receives handsome
returns.
(2)
The agents have tendencies to hop jobs.
(3)
The benefit should pass on to the
insurance companies.
(4)
The government should receive a part of
the commission.
(5)
Not mentioned in the passage
Q.5. What
was the objective of IRDA behind putting forth a new set of regulations?
(1)
More and more people should understand
the need of getting insurance policies.
(2)
Many features of traditional insurance
policies were not in favour of the customer.
(3)
Some of the insurance companies were
incurring loss.
(4)
It intended to make the insurance market
more competitive.
(5)
Not mentioned in the passage
Q.6. In
which of the following scenario, according to the author, traditional plans may
not fetch good returns?
(1)
When the interest rates are high. (2)
When the government has been formed recently.
(3)
When the inflation rate is low. (4)
Only 1 and 2
(5)
Only 1 and 3
Q.7-8.Choose the word which is most nearly the OPPOSITE
in meaning as the word printed in bold as used in the passage.
Q.7. Lacuna
(1)
Honour (2) Failure (3) Vacuum (4) Advantage (5)
Diversion
Q.8. Trimmed
(1)
Investigated (2) Implemented (3) Increased (4) Disbursed (5)
Denied
Q.9-10.Choose the word most similar in meaning to the word printed in bold, as used
in the passage.
Q.9. Stipulations
(1)
Provisions (2) Limitations (3) Designations (4) Sections (5)
Requests
Q.10. Refurbished
(1)
Rehabilitated (2) Cured (3) Regulated (4) Suspected (5) Revised
ANSWERS
Q.1.(5)
Q.2.(3)
Q.3.(2)
Q.4.(1)
Q.5.(2)
Q.6.(5)
Q.7.(4)
Q.8.(3)
Q.9.(2)
Q.10.(5)
