One-Year Free-Look Cancellation Could Lead to Financial Losses to Insurers

A senior insurance official told DC, “A one-year free-look cancellation period means a person could return his life insurance policy on the 364th day and ask for his premium to be returned. But the insurer has covered the risk of his life for 364 days. His risk cover started from the date of commencement of the policy, and if he had died the next day, his nominee would be entitled to the full sum assured.”

“Secondly, the insurance company has paid a 40 percent commission to the agent, has incurred administrative costs towards the policy, and cannot recover all the costs. Thirdly, other financial products, such as mutual funds, have exit loads, while fixed deposits have a penalty if redeemed before maturity,” added the insurance official.

Vighnesh Shahane, former managing director and chief executive officer of Ageas Federal Life Insurance, said, “While the one-year free-look period is certainly customer-centric, there is a chance it could be misused by agents and customers, leading to financial losses for insurers. Agents of other companies will influence customers to cancel the current policy and buy a better policy from another insurer. Also, when a policyholder buys a policy, I incur costs which would be offset against future premiums. Insurers' profitability, which is based on persistency, will be impacted.”

“One month is sufficient time for policyholders to understand the terms and conditions and realize if it was mis-sold to them or not. While mis-selling is a problem, there are other ways of mitigating it,” Shahane added.

Last week, at the post-budget press conference in Mumbai, Finance Minister Nirmala Sitharaman said that the government has asked insurers to extend the free-look period for insurance policies from the current one month to one year to curb mis-selling. The free-look period is the timeframe during which policyholders can cancel their policy without penalties if they believe it was mis-sold. It starts once the policy is delivered, either physically or by mail in digital format. According to the Master Circular on Protection of Policyholders’ Interests issued by IRDAI in September 2024, if a policyholder decides to cancel his policy within the free-look period, the insurer can only deduct the proportionate risk premium for the period of cover and the expenses, if any, incurred by the insurer on the medical examination of the proposer and stamp duty charges.