Govt Plans 1-Year Free-Look Period for Insurance

In a major policy shift aimed at enhancing consumer protection, the Indian government has proposed extending the ‘free-look’ period for insurance policies from the current 30 days to one year. This move is expected to help policyholders review their insurance terms carefully and prevent mis-selling in the industry. The proposal, announced by the Department of Financial Services Secretary M. Nagaraju, is part of broader regulatory changes aimed at improving transparency in the insurance sector. Public sector insurers have already been instructed to implement this extended period, while private insurers are being encouraged to follow suit.

What Is the Free-Look Period in Insurance and How Has It Changed?

The free-look period is the duration during which a policyholder can review their insurance policy and cancel it if they are not satisfied. Traditionally, the Insurance Regulatory and Development Authority of India (IRDAI) mandated a 15-day free-look period for policyholders, which was later extended to 30 days for policies purchased online. During this period, if the policyholder chooses to cancel the policy, they receive a refund after deductions such as medical examination costs and stamp duty charges.

With the proposed extension to one year, policyholders will have significantly more time to evaluate whether their insurance plan aligns with their financial goals. This move is primarily aimed at reducing cases of mis-selling, where consumers are sold policies that do not meet their actual requirements.

Why Is the Government Pushing for a One-Year Free-Look Period?

The government’s decision to extend the free-look period is driven by concerns over mis-selling of insurance products, particularly to first-time buyers who may not fully understand the policy terms. By providing a longer timeframe, policyholders can make an informed decision about their insurance coverage without feeling pressured into keeping a policy that does not suit their needs.

Additionally, the government has introduced a ‘call-back’ policy, where insurers must contact new policyholders post-purchase to confirm their understanding of the policy. This step aims to further reduce the risk of consumers unknowingly purchasing unsuitable insurance products.

What Are the Industry Reactions and Possible Challenges?

While the move is seen as a win for consumer rights, industry experts have raised concerns about its practicality. A one-year free-look period may pose financial risks for insurers, as it could lead to policy cancellations even after the policyholder has received benefits such as medical coverage. If consumers cancel policies after claiming benefits, it may disrupt the risk pool balance, potentially leading to higher premiums for all policyholders.

Another concern is the operational feasibility of maintaining policies for a year with an open cancellation option. Insurers may have to change their underwriting processes and premium structures to account for the extended review period.

This change could bring both opportunities and risks for the insurance industry. While consumers will benefit from greater protection, insurers may need to introduce safeguards to prevent misuse of the extended free-look period.

Balancing Consumer Protection and Industry Stability

The proposed extension of the free-look period to one year is a significant step toward increasing transparency and protecting policyholders from misleading sales practices. However, its long-term impact on the insurance industry remains to be seen. If implemented carefully, it could create a more trustworthy insurance ecosystem, benefiting both consumers and insurers. As the government moves forward with this proposal, balancing consumer rights with the sustainability of the insurance industry will be crucial.

Key Highlights of the Proposed Free-Look Period Extension