Recently, FM Nirmala Sitharaman urged insurers to hike the free-look-up period available to insurance policyholders from its present threshold of 30 days to 365 days, or an entire year. According to government officials, this will help prevent the rampant misselling of insurance policies since individuals will potentially have around a year to carefully review the policy and return it if it does not fulfill their requirements.One of the reasons why the government is also thinking of raising this free look-up period is because, as experts point out, life insurance policies are often bundled with the sale of other financial products, often leaving them with no choice. Moreover, people do not realise this until the policy comes up for renewal annually, at which point they might be forced to pay the premium.
While this increased free-look period may look like a good idea on paper, and in the interest of the policyholders, will its implementation be so simple? Will upping the free look period duration to 1 year from 30 days really benefit policyholders? We take a look.
What is the free look-up period?
As defined by the Master Circular on Protection of Policyholders’ Interests issued by IRDAI dated September 2024, from the date of receipt of the life insurance policy, which has a policy term of 1 year or more, every policyholder will have a period of 30 days known as the free-lookup period.
The free-lookup period starts once the policy is delivered either physically or by mail in digital format. This period is available to policyholders so that they can carefully review the terms and conditions of the policy and decide whether or not it is suited to their needs.
The circular also notes that in case the policyholder is not satisfied with policy terms or conditions, they have the option to return the policy within these 30 days to the insurer for cancellation and get a full premium refund. “Irrespective of the reasons mentioned, the insurer must accept the request of the policyholder to exercise the option of free look cancellation. The policyholder shall be entitled to a refund of the premium paid, subject only to a deduction of a proportionate risk premium for the period of cover and the expenses, if any, incurred by the insurer on medical examination of the proposer and stamp duty charges,” the circular adds. This means that if the policyholders decide to cancel the insurance policy within this 30-day free look-up period, the insurers will have to refund them their premium paid in full and can only deduct stamp duty charges and expenses undertaken by them for conducting a medical examination of the prospective policyholder.
In case there is any delay in refund, i.e., the insurer does not credit back the amount to the policyholder within 7 days, IRDAI’s master circular lays down provisions for that as well.
Not only will the insurer have to refund the entire amount, but they will also pay interest at the bank rate plus 2% on this refundable amount. This interest calculation will begin from the date of receipt of the request for free look cancellation till the date of refund. This penal interest will have to be paid suo-moto by the insurer.
How practical it is to extend the freelook period to 1 year?
Extending the freelook period to one year appears to be a move that will help policyholders; however, when we dig deep, we encounter many challenges in making it work on the ground. A one-year free-look period in both life and health insurance would be highly impractical due to financial risks and potential misuse, says Narendra Bharindwal, Vice President, of the Insurance Brokers Association of India (IBAI)
Shilpa Arora, co-founder & COO of Insurance Samadhan, says that IRDAI’s existing 30-day free-look period is sufficient. Extending this period to one year could mean exponentially more frauds taking place, since people may look to exploit this loophole by buying a policy, benefiting from the same for 11 months, and claiming a full premium refund right before 12 months are about to expire.
“This could pose a significant risk for insurers, as individuals might purchase policies solely to cover short-term liabilities, such as loans, and then cancel them within the free look-up period to reclaim the premium,” she adds.
“Currently, the 15 to 30-day free-look period allows policyholders to cancel policies with a refund after necessary deductions. Extending this to a year raises concerns, especially in health insurance, leading to moral hazard and adverse selection. In life insurance, healthier individuals may cancel while those with serious illnesses retain their policies, disrupting the insurer’s risk pool,” he adds.
Is a longer free-look period even feasible?
Hanut Mehta, Co-Founder and CEO at Bimapay Finsure, observes that while a longer free-look period may be feasible for life insurance, given its long-term nature, implementing the same for health insurance, typically a short-term product, is not practical.
“A 30-day free-look period is sufficient for health insurance, as insurers already allow partial refunds beyond this period if no benefits have been utilized. For consumers, having more time to assess a policy might seem beneficial, but insurance is designed as a safety net for unexpected situations. Rather than simply extending the free-look period, strengthening consumer awareness, simplifying policy terms, and ensuring clearer communication at the time of purchase might be more effective,” he adds.
According to Gaurav Goel, SEBI RIA, “While a one-year free look period might sound appealing, it’s not the most practical or beneficial solution for either insurers or policyholders. A shorter, well-defined free-look period, coupled with clear and comprehensive policy documentation, is a more effective way to ensure policyholders make informed decisions and are satisfied with their insurance coverage.”
Insurers would face greater uncertainty and risk, as policyholders could potentially use the policy for a year (especially health insurance) and then cancel it, leaving the insurer to bear the costs of any claims. Naturally, it would also be difficult to accurately price policies with such a long free-look period, potentially leading to higher premiums for everyone in the long run.
Free cancellation already exists
As per Amit Chhabra, Chief Business Officer, General Insurance at Policybazaar, while it is too early to comment on this matter, policyholders must remember that they already have the facility for free cancellation of their life and health insurance policies throughout the year. This means that they can cancel their policy anytime they want during the year and get a pro-rata refund.
“If I have purchased a policy for 1 year and wish to cancel it within 6 months, I am eligible to get a 50% refund of my premium. But a 100% refund without any pro-rata adjustments will have far-reaching consequences for the insurance industry and can make insurance expensive for everyone in the long run,” he adds.
IRDAI’s master circular highlights that if a policyholder wishes to cancel an indemnity-based health insurance policy, they can do so by giving a 7-day notice period. In such cases, “insurers should refund the proportionate premium for the unexpired policy period if the term of the policy is up to one year and there is no claim(s) made during the policy period.
In respect of policies with a term of more than 1-year risk coverage for such policy years that have not commenced, you get a refund of the premium for the unexpired policy period.
When a policyholder surrenders their life insurance policy in the first year itself, a higher of the two—either guaranteed surrender value (GSV) or special surrender value” (SSV)—becomes payable after the completion of the first policy year. However, this is subject to one full year of premium that have been paid by the policyholders.
Going by the opinion and views shared by experts, it looks very challenging to implement the proposal of a 1-year free look period, unless the government comes up with new rules which proves otherwise.
