Free-look period in Insurance

A way to protect the policyholders from the misselling of insurance.

Insurance is the most missold financial product in India. The commission that the agents receive on an insurance policy is anything between 40% to 60% of the first few premiums paid (depending upon the insurance company) thus, making insurance a very saleable product. To overcome this issue, IRDA (the governing authority of insurance) has launched the free-look period in Insurance.

How does Free-Look Period Cancellation work

When you receive the policy document, there are a few things that you must verify and go through in detail, the insurance contract, the policy certificate, the benefit illustration, product brochure, terms and conditions of the policy, etc. While in most of the cases everything is fine, in a rare few, there could be any of the following expectation gaps.

  • What you have been told is not what has been sold to you;
  • The terms & conditions of the policy are not as per your expectations;
  • The features, benefits and policy exclusions, as understood by you are different from what is actually included;
  • There could be any other reason for disappointment.

The IRDA has stipulated that certain insurance contracts can be returned to the insurer under certain conditions, i.e. they can be canceled and you would get back the full premium amount paid.

How many days is the limit for Free-Look period

When bought from an agent, bank or any other physical intermediary, the limit is 15 days from the date of receiving the policy document at your communication address

When bought online and/or telephonically, the Free-Look Period limit is 30 days.

Also, please note that the period does not start from the Date of Issuance of the Policy but from the date you actually receive the policy document. If you are unable to initiate Free-Look Period Cancellation within the relevant period, you can still cancel the policy later, however, that is termed as Policy Surrender and very different rules will apply. However, if you opting for the free look period cancellation, you must do it yourself and do not rely on your agents or intermediary because they might not do the same within the stipulated time. 

What kind of insurance policies are eligible for Free-Look

Not all kinds of insurance policies get this benefit. It is applicable only to the following.

  • All Life insurance policies
  • All Health insurance policies with a policy period of at least 3 years

What is the free-look period

If you want to exercise the right to cancel the policy within the Free-Look Period, you need to ensure that you do it in writing by submitting the same to the company within the stipulated time. Ensure that you get an acknowledgment from the company of having done so – it is very important. You may need this later if there is ambiguity over the cancellation request.

What are the charges for Free-Look Period Cancellation

Charges will be deducted by the insurance company before they refund you the premium you initially paid. Please note them carefully – all may not be applicable to you. Some of the charges which may or may not apply to different companies are mentioned below.

  1. Stamp Duty Charges– When a policy is issued, the insurer has to pay this amount to the exchequer. This cannot be refunded by the Govt to the insurer on cancellation of the policy. Hence it is not refunded to you. These charges are approximately 0.2% of the Sum Assured (life/health cover), not of the Premium.
  2. Insurer’s Administrative Charges: Scrutinizing your insurance proposal form, processing it through underwriting, issuing the policy, dispatch – all this comes at a cost. The insurer may deduct a nominal fee as administrative charges. There is no fixed rule – the amount or rate varies from insurer to insurer.
  3. Cost of Medical Tests: If your policy proposal involved a medical test, the company incurs them for you. If the policy is continued, the company bears the cost. But if you return/cancel the policy, you will have to take the hit from the premium paid. The amount depends on the kind of tests you have done and which medical center it was done at. If no medicals were done, nothing is deducted.
  4. Proportionate cost of Risk Cover: Please remember that from the date of issuance of the policy till the date you submit the cancellation request, the insurance company has actually taken the risk of your death. This risk comes at a cost and is called the mortality/risk cover charge. A proportionate fee (depending on the no. of days) is deducted by the company for the period that you were covered for.

If you feel that you do not need the policy; Do NOT STAY INTO THE POLICY only to avoid the above costs. These are nominal costs in comparison to the amount that is going to go per annum as an insurance premium.

Also, many times when we are lured into buying insurance that we do not need or does not match our requirements. In such a case, Free-look is the second opportunity you get to decide on that insurance policy. The best way to avoid any hassle is to understand by yourself which policy is required or from your financial advisor (Please refer to our article financial advisor and policy agent is not the same). Be careful.  Make use of the benefit provided by IRDA to safeguard yourself from the misselling of insurance.

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