MUMBAI: After many a dilly-dallying and revision spanning close to three years, the new surrender value norms by regulator Irdai, which is effective from October 1, will significantly alter the life insurance landscape.
The new norms mandate life insurers to pay back higher amount to a policyholder who chooses to switch or surrender her policy. This goes a long way to protect customer interest and make insurers become more professional and also contain misselling, one of the biggest pains plaguing the insurance sector.
For the uninitiated to the life insurance lexicon, the surrender value is the money a policyholder receives if she terminates her policy before maturity. It’s usually the cash value of the policy minus any surrender fees/penalties.
The new norms will also help a life policyholder in many more ways including higher early-exit payouts with higher surrender value, easier portability, lesser deductions and penalties, and fewer chances of misselling as the agent may lose money if the policyholder stops paying premium early, and the customer, if not made the king yet, is assured of getting a fair treatment.
New regulations
The Insurance Regulatory and Development Authority of India (IRDAI) released new regulations on the surrender value of life policies in June 2024 with effective implementation from October 1. The initial draft was out in December 2022 which proposed a higher surrender value but underwent many revisions.
The regulator says every policy offered by a life insurer under a non-linked platform and has acquired a surrender value should not lapse for non-payment of further premium. It should be kept in force to the extent of the paid-up sum assured, calculated by means of a formula it has approved and the reversionary bonuses or the guaranteed additions, if any, already attached to the policy.
This means policyholders will get a higher refund on discontinuation under the new calculation method even after paying just a one-year premium. Before this, no surrender value was applicable to policies in the first two years of surrender/cancellation. And even from the third year, the payback was very nominal and was arbitrarily given.
Now on, for the discontinued/lapsed for non-payment of premium or ported out policy after one year, you will get as much as 80-85% of the premium paid. For instance, if you paid a monthly premium of Rs 10,000 (Rs 1,20,000 for a year), you will get slightly over R1 lakh as the surrender value. Till now, there was zero refund for one year.
The new norms have set some specific valuation methodologies for surrender. The following are the key benefits for a policyholder now:
Higher refund
A policyholder is legally eligible to receive a higher portion of her premium back if she surrenders the policy after the first year. For example, if your policy monthly premium is Rs 20,000, you can receive 80-85% of the premium paid after one year. Earlier you weren’t eligible for a single penny.
The Irdai master circular states: “the special surrender value (SSV) calculated shall become payable after completion of the first policy year provided one full year premium has been received.” The new norms also say the insurer must ensure that the SSV is at least equal to the expected present value of the paid-up sum assured on all contingencies, paid-up future benefits, and accrued/vested benefits, accounting for any survival benefits already paid.
Not just that there is also a specified rate of interest to be charged as part of the calculations, which states that the interest rate cannot exceed the prevailing yield on 10-year G-Secs plus a 50 bps spread. Earlier, after two years, the policyholder was only entitled to an unspecified guaranteed surrender value.
Fewer chances of misselling
One of the biggest benefits for customers apart from getting higher value back, is the fear of becoming a victim of misselling. The new regulations leave both insurers as well as agents fewer chances of misselling or rather no incentive to wrap an average returning policy as a high return one, as they may lose money if the policyholder stops paying premium early.
Easier portability
The new norms not only allow you to surrender, it also give you the option to port out to a new insurer—exactly like you do with your mobile connection for decades and with your health cover since this April. Now you can switch your insurer without losing much money.
Impact on Industry
Industry wide, the new norms will lead to significant changes in product and commission structures, leading to volatile premium movement in the second half of the current fiscal. However, as these changes are anticipated to be favourable for customers, the growth is likely to rise over the medium term, according to Care Ratings.
New IRDAI rules
IRDAI released new regulations on the surrender value of life policies in June 2024 with implementation from October 1
Every policy offered by life insurer under a non-linked platform and has acquired a surrender value should not lapse for non-payment of further premium.
For the discontinued/lapsed for non-payment of premium or ported out policy after 1 year, you will get 80-85% of the premium paid
A policyholder is legally eligible to receive a higher portion of her premium back if she surrenders the policy after the first year
The new norms not only allow you to surrender it also give you the option to port out to a new insurer