IRDAI
Starting from October 1, 2024, policyholders will benefit from larger refunds when surrendering their life insurance policies. The Insurance Regulatory and Development Authority of India (IRDAI) has introduced new rules requiring insurance companies to offer a special surrender value (SSV), particularly for traditional endowment policies. This change is designed to provide more flexibility and liquidity for policyholders, making life insurance products more accommodating to customer needs.
Previously, if a policyholder surrendered their life insurance policy within the first few years, they would typically receive only 50% of the total premiums paid between 4th and 7th year if suppose it is 10 year life insurance policy, along with any bonuses accrued. This often resulted in significant financial losses for those exiting their policies early. Under the new guidelines, the special surrender value will provide policyholders with a higher refund.
For instance, a policyholder who had paid Rs. 2 lakh in premiums and accrued a bonus of Rs. 40,000 would have received Rs. 1.2 lakh upon surrendering the policy after four years. With the new regulations, the refund will increase to Rs. 1.55 lakh, offering a more substantial return for those who exit their policies early.
Under the previous rules, policyholders who exited their life insurance policies after just one year would lose their entire premium. The new IRDAI guidelines provide a higher surrender value, even for those who exit in the early stages of their policy.
The special surrender value (SSV) is now calculated based on the paid-up sum assured and any accrued bonuses, ensuring that policyholders receive a more equitable refund, regardless of how long they have held the policy. This new system offers policyholders more flexibility, allowing them to exit without losing all their invested premiums.
The IRDAI issued a master circular on June 12, 2024, outlining how the special surrender valueshould be calculated. According to the guidelines, the special surrender value must be at least equal to the present value of the following:
The paid-up value of a policy is calculated using the following formula:
Paid-up value = (Number of premiums paid à Sum assured) ÷ Total number of premiums payable.
The expected present value of the paid-up sum assured and future benefits is calculated using a maximum spread of 50 basis points over the 10-year G-Sec yield, as specified by the IRDAI. This ensures that policyholders receive a fair and transparent refund amount.
To further protect policyholders, the IRDAI has made it mandatory for insurers to provide detailed information about surrender values. Insurers must now include the following in their benefit illustrations:
These details must be provided to the policyholder at the time of sale, alongside the policy prospectus. The benefit illustration must be signed by both the policyholder and the insurance agent or intermediary, ensuring transparency and clarity. This signed document will become part of the policy contract, helping policyholders better understand the surrender value they are entitled to if they choose to exit their policy.
The new surrender value rules are a significant win for policyholders, especially those who may have been mis-sold life insurance policies. Mis-selling has been a growing problem in the insurance industry, leaving many policyholders stuck with policies that do not meet their financial needs. The introduction of higher surrender values allows these individuals to exit their policies without suffering heavy financial losses.
While some insurance companies, including the Life Insurance Corporation of India (LIC), have requested an extension to comply with these new regulations, the IRDAI has not granted any official extension. As a result, insurers will need to comply with the new rules by October 1, 2024, ensuring that policyholders benefit from the new surrender value calculations as soon as possible.
The IRDAI's new surrender value norms represent a positive step towards making life insurance more customer-friendly. These new rules offer policyholders greater flexibility and liquidity, ensuring that they can exit policies that no longer meet their needs without losing a significant portion of their premiums. By increasing the transparency of surrender value calculations and mandating that insurers provide clear benefit illustrations, the IRDAI is making it easier for policyholders to make informed decisions about their life insurance policies.
This move is particularly relevant at a time when consumers are demanding more flexible and adaptable financial products. With the new surrender value norms, policyholders can be confident that they will receive a fair and transparent refund if they choose to surrender their policies.
It is important to note that the new surrender value rules apply specifically to traditional endowment life insurance policies. Term insurance, on the other hand, is a pure protection policy that does not typically come with any surrender value. In term insurance, the policyholder only receives a payout if the policyholder's death occurs during the policy term. Since term insurance is designed solely for risk protection and does not accumulate cash value over time, the new surrender value rules do not apply to such policies. Therefore, policyholders considering surrender should be mindful of the type of life insurance policy they hold.
Conclusion
The changes to life insurance policies that take effect on October 1, 2024, offer significant benefits for policyholders. By increasing the special surrender value (SSV) and mandating greater transparency in benefit illustrations, the IRDAI has ensured that policyholders will receive larger refunds when surrendering their life insurance policies. These new rules provide policyholders with more flexibility and liquidity, allowing them to exit policies that no longer meet their needs without incurring substantial financial losses. As insurers prepare to comply with these regulations, policyholders can look forward to a more customer-friendly life insurance experience.
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