Insurance firms were encouraged by Finance Minister Nirmala Sitharaman last month to increase the free look period from one month to a year. Take a look Period is often a brief window of time during which the insured can cancel the policy at no cost to him and receive a reimbursement from the insurer if he is unhappy with it. There have been some proposals to extend the free look time from 15 to 30 days, and in my opinion, doing so for a whole year would not have any major negative effects. A one-year free look period is a smart idea as it allows the policyholder enough time to comprehend the subtleties and fine print of the policy. In order to decrease mis-selling and give policyholders more time to comprehend their policies, a one-year free look period for insurance products has been proposed in India. A one-year free look period will guarantee that misselling incidents are reduced. Based on an interview with Gaurav Goel (Entrepreneur and SEBI RIA), let’s see who actually benefits from the one-year free look period for insurance plans.

1. Is it practically feasible for insurers to have a free-look period, especially in life and health insurance policies, where premiums can be paid for even 1 year? What will happen to the premium paid if the policyholder decides to return the policy after 1 year?

Free look Period is usually a short period of time which is given to the insured to cancel the policy free of charges if he is not satisfied with the policy and get the refund from the insurer. Some suggestions relating to increasing the free look period from 15-30 days have been raised and to my mind it is quite possible to stretch it to a 1-year period without any significant adverse impact. This would result in enhanced fair play as instances of mis selling will reduce.

However, if the policyholder decides to cancel the policy after a period of 1 year, then instead of the cancellation, the surrender value of the policy should be given to the policy holder which means a lower value than the total premium paid by the insured.

2. Is a one-year free look period really required, both from the perspective of the insurance company and the policyholder? Who will the 1-year free look period really benefit?

One-year free look period is a good proposal as it gives sufficient time to the policy holder to understand the nuances and the fine print of the policy. The insurance market is plagued by high degree of mis selling due to high brokerages given to the intermediaries. One-year free look period will ensure that instances of mis selling are curtailed.

The benefits of the extension would largely be limited to the policyholders and impact the profitability of the insurance company to some extent. It can also hurt the insurance brokers as they will have to return the commission they had received from the insurance companies. It is advisable that provisions should include a medical expenses deduction from the premium upon cancellation.

3. How will one-year free look period be implemented, if it is brought into action?

The one-year free look period for insurance policies is a proposed measure in India aimed at reducing mis-selling and giving policyholders more time to understand their policies. While the exact implementation details are still being worked out, here’s how it’s likely to function based on current information:

We expect the extended free look period insurance policies to all kinds of insurance products (Life, General and Health). The exceptions are likely to be limited. While the intent is to refund the full amount to the policyholder, there could be minor deductions incurred by the insurance company in conducting the medical examination of the insured.

The reason for the cancellation should be properly communicated by the policyholder. In case the reason for cancellation is not mis selling by the selling intermediary then he should be compensated by some percentage of the original commission by the insurance company. To accommodate for additional expenses, insurance companies may have to raise the premium slightly which should be acceptable to all.