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Long-term insurance for cars, homes: pros and cons

IRDAI has proposed to allow insurers to offer fire and allied peril cover for 30 years with sum insured of Rs 5 crore and more to standalone residential houses, villa complexes, and apartment blocks that are managed by housing cooperatives or any other body representing homeowners.

The regulator has allowed general insurance companies to offer motor insurance for three years to private cars and five years to two-wheelers. (Representational)

The Insurance Regulatory and Development Authority of India (IRDAI) has proposed long-term insurance cover for cars, two-wheelers, villas, and residential complexes in a move to offer wider choice and convenience to customers.

Long-term motor policy

The regulator has allowed general insurance companies to offer motor insurance for three years to private cars and five years to two-wheelers. IRDAI had made such a proposal two years ago, but decided to do away with the long-term package policy from August 1, 2020 to combat challenges including lack of uniformity, customer confusion, and dissatisfaction.

According to the new IRDAI draft, the insured declared value (IDV) or sum insured agreed to by the policyholder, premium, and add-ons should be mentioned in the policy schedule. The depreciation rate on the IDV should not exceed 10% per annum during the policy period, and “the premium for the entire term of the policy coverage should be collected at the time of sale of insurance”.

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The no claim bonus (NCB) grid specified for 1-year ‘own damage’ (OD) policies would also be applicable for long-term policies; the NCB applicable at the end of the tenure for long-term policies would be the same as would have been earned if such policies were renewed annually, IRDAI said.

Fire insurance for 30 yrs

IRDAI has proposed to allow insurers to offer fire and allied peril cover for 30 years with sum insured of Rs 5 crore and more to standalone residential houses, villa complexes, and apartment blocks that are managed by housing cooperatives or any other body representing homeowners.

In respect of risks with sums insured up to Rs 5 crore for offices, hotels, and shops, the duration should not exceed 5 years, according to the draft norms.

Pros and cons of product

Buying a long-term product means one does not have to renew the policy every year. Financial experts say it also locks the customer into the product for 3-5 years at existing cost; general insurance products by contrast are annual contracts with a possibility of price increases.

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“By paying upfront, one can protect against the rising cost of insurance products. One can also demand discounts from insurers while going for long-term products,” said Vishal Dhawan, founder, Plan Ahead Wealth Advisors.

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The disadvantage is the increase in the upfront cost of owning a vehicle. An expert said 3-year and 5-year third-party insurance is compulsory for new vehicles even now; IRDAI’s move seems to be aimed at making multi-year OD too a reality.

It must also be noted that by paying premium for five years in one go, a customer will miss out on any reductions that may happen due to market factors such as increased competition. And an individual who sells the vehicle after a year or two will find it difficult to recover the premium amount paid for the years in which she would no longer be the owner.

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For residential properties, long-term products may be a good option because these properties are often bought on loan, and there is a clear benefit of discounts.

Implementation challenges

Certain concerns are being raised over the implementation of the long-term policy package.

Insurers faced challenges in the actuarial pricing for the long-term motor OD cover and fire insurance. The package policy may face challenges in distribution on account of affordability among vehicle owners. There is also a possibility of forced selling by financial institutions to customers who buy vehicles on loan. Also, the structure for NCB was not uniform across insurers, and caused dissatisfaction among policyholders.

Possible exit option

Earlier, when IRDAI introduced long-term cover for vehicles, customers had no flexibility to change their plan before three years if they were unhappy with the insurer’s service. IRDAI has now proposed that every policy should have a 30-day free-look period from the date of inception in order to enable the holder to review the terms and conditions.

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An option to cancel has been proposed, and policyholders would be entitled to a refund of the premium on a pro-rata basis in the event of exercising the free-look cancellation option.

Reasons for the move

In 2018, a committee appointed by the Supreme Court observed that nearly 66% of on-road vehicles were uninsured. Accidents involving these cars, particularly the victims, were adversely affected since it meant paying out of their own pocket or using their insurance cover to pay for damage that was not their fault. Also, those who died did not get adequate compensation since the vehicles weren’t insured. The court made it mandatory for new vehicles to buy long-term bundled insurance — 3 years for four-wheelers and 5 years for two-wheelers — to eliminate this problem.

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Also, natural calamities like floods, earthquakes, and cyclones lead to huge losses to the public as homes and shops are destroyed. More than 90 per cent of dwellings in India are not insured.

First published on: 09-12-2022 at 08:00 IST
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