New rules take cover off insurance policy funding

You may soon have to furnish proof of income for buying a life insurance policy when the annual premium is above Rs 50,000.

If the premium and top-ups (lump sum injections) exceed Rs 1 lakh in the first year, not only will proof of income be mandatory, but also the source of funds will have to be established. In fact, some insurers may even insist on your income-tax returns.

These requirements for buying life insurance policies are part of the anti-money laundering guidelines issued by the Insurance Regulatory Development Authority of India (IRDA) last month.

Earlier, anti-money laundering guidelines were made applicable to the mutual fund industry in 2002, and the banking industry in 2004.

Under the new rules, insurance companies will stop accepting premium above Rs 50,000 in cash. Besides, a customer will have to provide documents that prove his identity and residential address.

Unit-linked products that provide for withdrawals and unlimited top-ups to premiums, single-premium products in which the money is invested in lump sum and withdrawn at the earliest opportunity, and "free-look" cancellations of big-ticket policies will be scrutinised by insurance companies.

In "free look" cancellations, a policyholder can cancel a policy within a specified time, and get back the premium paid.

However, the buying of term insurance products, group insurance, and stand-alone health/medical insurance will not face similar queries, as these are low-risk products with restricted payout conditions, and are properly guarded by underwriting guidelines.

Policies with a premium of Rs 50,000 or above are largely sold by private sector companies, and they could constitute up to 8-10 per cent of the total life insurance premium.

For Life Insurance Corporation, which primarily caters to the mass market, such policies are a small percentage of its total premium income. The total premium income of life insurance companies in 2006-07 is expected to be close to Rs 45,000 crore, growing around 40 per cent over 2005-06.

Money laundering can take place if a person uses unrecorded cash for buying an insurance policy and soon after opts for its cancellation, getting from the company a refund cheque.

The unrecorded cash thus becomes legitimate. Similarly, illegal third-party fund transfers can be done through an insurance policy by assigning it to some person outside the immediate family.

Industry experts, however, do not have estimates on the money laundering that takes place in the insurance industry.

According to Rahul Sinha, senior vice-president (marketing) at Kotak Life Insurance, the industry has 1.5 million trained agents, 750 distributors, and over 10,000 employees of companies to implement the money laundering guidelines.