The Rebate Offer and the Surrender Suggestion
Rakesh, 42, is a bank clerk in Nagpur earning ₹9.2 lakh a year. He has a wife, two school-going children, a ₹26 lakh home loan and ₹1.4 lakh in savings. Meera, an agent with Insurer A, has done a needs analysis and recommended a ₹1 crore term plan with a ₹32,000 annual premium plus a ₹3 lakh rider package. Before signing, Rakesh's cousin Suresh - an agent with Insurer B - intervenes. Suresh offers to pay ₹9,000 of the first premium out of his own commission, promises a ₹5,000 shopping voucher if the proposal is signed the same day, and says Rakesh should surrender a six-year-old endowment policy with Insurer C because its 4.5% return is 'useless' and the new policy will 'give 12%'. Rakesh, who likes the idea of paying less, asks Meera to match the offer or he will move to Suresh. He has not yet told either agent that he was hospitalised for an episode of arrhythmia two years ago.
1. Rakesh asks Meera to match Suresh's offer by paying part of the premium from her commission. What must Meera do, and what are the consequences for Rakesh and for Suresh?
Read the worked answer
Meera must refuse - clearly, politely and on the record.
- The legal position. Section 41 of the Insurance Act, 1938 prohibits any person from giving, soliciting or offering, directly or indirectly, any rebate of premium or of commission as an inducement to take a policy. The offence catches the giver and the person who accepts. The penalty can extend to a fine of up to ₹10 lakh.
- Meera's own exposure. Rebating breaches the code of conduct for agents. Realistic consequences: termination of appointment by the insurer, removal from the Authority's register of agents, claw-back of commission already paid, and loss of the licence that is her livelihood.
- Rakesh's exposure. He would be a party to an offence to save ₹9,000 on a ₹1 crore protection need. He should also see the incentive for what it is - a sale built on inducement rather than on suitability.
- What she says instead. Compete on the merits: premium, riders, claim settlement record, solvency ratio, service. She must not counter-offer a rebate, must not disparage the competitor, and must not threaten Rakesh.
- Documentation. Record in the agency system what was offered, when, and what Rakesh decided. If Suresh is appointed by another insurer, that insurer's compliance officer is the right recipient of a factual complaint - not a warning to the client.
The judgement the exam is testing: an agent loses the sale rather than breach Section 41, and protects the client from a short-term 'discount' that is an offence.
2. Evaluate Suresh's advice to surrender the six-year-old endowment policy and take a fresh one. What should Meera establish before advising on replacement?
Read the worked answer
The advice is a classic churn and must be tested against the client's interest, not the commission.
Points Meera must establish:
- Current surrender value and paid-up value. After six years of premiums an endowment policy usually has a surrender value and can be made paid-up, retaining a reduced guaranteed sum assured with no further premiums. Surrender destroys the life cover; paid-up preserves it.
- The '4.5% vs 12%' comparison is not like-for-like. An endowment bundles guaranteed maturity plus a death benefit plus (often) bonuses. A projected 12% on a market-linked product is an illustration, not a promise, and is before charges.
- Cost of re-entry. A fresh policy means new acquisition costs, a new suicide exclusion period, a new three-year window under Section 45, and premiums based on age 42 rather than the age at which the old policy started.
- Insurability. The arrhythmia hospitalisation is material. If Suresh writes the new proposal without it, the replacement is built on a misstatement; if he writes it honestly, the new plan may be loaded or declined. Either way, the old policy - already in force - is the safest asset Rakesh holds.
- Affordability and objective. Is Rakesh replacing to get more cover, or to get a higher projected return? If the need is protection, the answer is a term plan added alongside the existing policy, not surrender.
Meera should document the comparison, let Rakesh decide, and never sign a replacement without recording why it is in his interest.
3. Rakesh says the arrhythmia hospitalisation was 'only a check-up' and asks Meera not to mention it. How should she respond?
Read the worked answer
She must insist on disclosure and explain why, without alarming him into walking away.
- It is material. Any hospitalisation for a cardiac episode two years earlier, and any cardiac investigation, is exactly the information a life underwriter prices. 'Only a check-up' is not the agent's judgement to make.
- The consequence of concealment. Under Section 45 of the Insurance Act, 1938, within three years of issuance, commencement of risk or revival (whichever is later), an insurer may repudiate a claim on the ground of fraud or misstatement of a material fact, provided it communicates the decision in writing. A repudiation two years later leaves Rakesh's family with no cover at the exact moment it is needed - and a refund of premiums is no substitute for ₹1 crore.
- Her duty. The agent must bring to the proposer's notice the importance of answering every question truthfully. She should record the answers as Rakesh gives them; she must not complete answers on his behalf or coach him.
- The practical path. Disclose, attach the discharge summary and investigations, and let the insurer decide. Possible outcomes are standard rates, a loading, an exclusion, or a decline; if one insurer declines, the file can be placed with another on honest terms. A rated policy in force is always better than a clean policy that will not pay.