NEW DELHI: In a positive development for policyholders, the insurance regulator has proposed to amend rule to increase the surrender value of traditional life insurance policies. Surrender value is the amount that an investor receives if she surrenders the policy without completing the full tenure of the policy.
The Insurance Regulatory and Development Authority of India (IRDAI) in a draft product regulation issued recently has proposed that there will be a premium threshold defined for each product, and no surrender charges imposed on the balance of the premiums beyond such threshold limits, irrespective of the timing of the surrender.
Currently, the surrender value is calculated as a percentage (or surrender value factor) of the total premium paid. The Surrender value factor increases with time. A traditional insurance policy or non-participating policy acquires a surrender value in the third year (after completing two years). The surrender value factor in the third year is 30%, 4-7th year is 50% and last two years of the policy term is 90%. So, if a policyholder surrenders his policy after paying `1 lakh premium annually for three years, she would get only Rs 90,000 {30*(`100,000*3)} as surrender value against her total investment of Rs 3 lakh.
But as per the new proposal, if threshold limit is Rs 25,000 for a non-linked savings insurance policy with annualised premium of Rs 100,000 and policy term of 20 years, then the surrendered value for threshold premium is Rs 22,500 (25,000*3*30%). The premium refund beyond threshold premium is 2,25,000 {`(1,00,000 – 25,000) x 3}.
So the adjusted guaranteed surrender value the policy holder receives after three years is 2,47,500 {Rs 2,25,000 + Rs 22,500}. The proposal if implemented may benefit those policyholders who could not continue their policies beyond a few years. However, insurance companies could get hit as their margins would come down. An insurance executive told this newspaper, on condition of anonymity, higher surrender value will adversely affect persistency ratio of life insurance policies.
If implemented, it will benefit policyholders
The proposal if implemented may benefit those policyholders who could not continue their policies beyond a few years. However, insurers could get hit as their margins would come down. An insurance executive said higher surrender value will adversely affect persistency ratio of life insurance policies