IRDAI Proposes Lower Life Insurance Commissions, Caps Payout at 25%

The Insurance Regulatory and Development Authority of India (IRDAI) has proposed a revised commission structure for life insurance products, with payouts linked more closely to the type of policy and the period over which premiums are paid. 

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

Under the consultation paper, commission limits for individual life insurance policies would vary according to the premium payment term. Longer payment periods would permit higher first-year commissions, while renewal commissions would remain lower. 

The proposals also seek to bring incentives, awards, reimbursements and non-cash benefits within the definition of commissions. 

First-year commissions linked to premium payment term 

For individual non-linked and linked life insurance policies where premiums are paid for less than five years, IRDAI has proposed a first-year commission ceiling of 5% for distribution entities and 6.25% for agents. 

For policies with a five-year premium payment term, the proposed limits increase to 10% for distribution entities and 12.5% for agents. 

Policies carrying a payment term of six to eight years could have first-year commission ceilings of 14% for distribution entities and 17.5% for agents. 

The proposed limits rise further for longer-duration policies. For a nine-year premium payment term, commissions could be capped at 18% for distribution entities and 22.5% for agents. 

For policies with premium payment terms of 10 years or more, the proposed first-year ceiling is 20% for distribution entities and 25% for agents. 

Renewal commissions proposed at lower levels 

The consultation paper also proposes lower commissions on renewals. 

The approach is intended to move the commission structure away from a heavy focus on first-year business and encourage distributors to support customers in continuing with multi-year premium payment plans. 

The regulator has also proposed lower commissions for single-premium products and products carrying tax incentives. 

For individual savings policies purchased through a single premium, the proposed first-year commission is 1% for distribution entities and 2% for agents. 

Different commission structure proposed for term insurance 

Pure-term insurance would follow a separate commission structure under the proposals. 

For individual pure-term policies purchased through a single premium, the proposed first-year commission ceiling is 7.5% for distribution entities and 10% for agents. 

The limits are considerably higher for pure-term policies where premiums are paid over multiple years. 

For such policies, the proposed first-year commission is capped at 25% for distribution entities and 30% for agents. 

Renewal commissions for these multi-year premium term policies are proposed at 7.5% for distribution entities and 10% for agents. 

Incentives and non-cash benefits could come under commission limits 

IRDAI’s proposal also addresses what can be counted as a commission. 

Rather than restricting the definition to direct commission payments, the proposed framework would include other benefits provided to distributors. 

These could include incentives, awards, reimbursements for selling expenses and non-cash benefits. 

The broader definition is intended to ensure that payments made to distributors are considered within the commission framework regardless of how those payments are structured or described. 

Proposals remain under consultation 

The changes outlined by IRDAI are part of a consultation paper and are not final regulations. 

If adopted, the framework would introduce different commission ceilings depending on the nature of the life insurance product, the premium payment period and whether the policy is sold through a distribution entity or an individual agent. 

The proposed structure would allow higher first-year commissions for longer premium payment terms while keeping renewal payouts comparatively lower. Single-premium products would generally carry lower ceilings, while multi-year pure-term insurance could permit first-year commissions of up to 25% for distribution entities and 30% for agents. 

Until the consultation process is completed and final rules are issued, the proposed limits remain subject to change.