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The House of Councilors Financial Affairs Committee approved a bill Thursday to allow troubled life insurers to cut guaranteed yields to policyholders, paving the way for Diet passage.

Committee members from the governing coalition of the Liberal Democratic Party, New Komeito and the New Conservative Party supported the bill to amend the Insurance Business Law.

The full Upper House is set to endorse the bill at a plenary session Friday, and the legislation is expected to take effect in late August.

Under current law, a life insurer can only cut its guaranteed yield after going bankrupt.

A guaranteed yield is the rate of investment return that an insurer promises its policyholders. A higher yield makes insurance premiums cheaper, and a cut in the yield would mean a reduction in insurance benefits.

The government-proposed legislation cleared the House of Representatives last month.

It is is designed to prevent life insurers from going bankrupt, which could destabilize the nation’s financial system.

All of the nation’s life insurance companies have said they do not plan to apply for permission to cut yields, fearing it would lead to a rash of angry clients canceling their policies.

The opposition camp criticized the new measure, saying it will force policyholders to shoulder the costs of a life insurance firm struggling to stay afloat.

Prime Minister Junichiro Koizumi said during Tuesday’s meeting of the Upper House committee it is “desirable” that life insurance companies avoid applying for yield cuts. However, it is “necessary to provide the alternative” to companies before they go under, he said.

Insurers promised high yields to attract customers during the asset-inflated boom years in the late 1980s. But plunging stock prices and record-low interest rates have made these promises hard to keep.

The bill requires a life insurance company applying for a yield cut to obtain consent from a minimum of 75 percent of representative policyholders.

Once an application is filed with the government, a policy cancellation becomes impossible.

After the government approves a yield cut, there will be a certain period before the cut is implemented, and if more than 10 percent of policyholders object during that period, no cut will be executed.