Starting next month, a
policyholder will get a higher refund if he exits his life insurance policy
during the initial years. The Insurance Regulatory and Development Authority of
India (Irdai) has asked the insurance companies to offer a higher special surrender
value (SSV) for traditional endowment policies from October 1, 2024. This is
expected to provide greater flexibility and liquidity for life insurance
customers who want to switch policies.
There have been several
reports that the insurers, including the Life Insurance Corporation of India
(LIC), urged Irdai to revise the surrender value regulations and extend the
deadline to comply with the norms. However, there is no official communication
or notice from Irdai stating that the regulator has accepted their request. In
absence of any extension, the insurance companies will have to comply with the
special surrender value regulations that will come into effect from October 1,
2024.
So as a life insurance
policyholder, you must know what the new surrender value rule is and how it
will be calculated. If you terminate your life insurance policy after one year,
how much money will you get back? ET Wealth Online decodes the new special surrender value rule
proposed by Irdai to answer all your queries.
Life insurance new rule: How is the special surrender value calculated?
In a master circular for
life insurance business dated June 12, 2024, the Irdai has said that the
special surrender value should be at least equal to the present value of
(a) paid-up sum assured on all contingencies
covered and
(b) paid-up future benefits (such as income
benefits), if any, and
(c) accrued/vested benefits, duly allowing for
survival benefits already paid (whatsoever name called), if any
Paid-up value is
calculated as per a formula: number of premiums paid X sum assured/total number
of premiums payable. To arrive at the expected present value of the paid-up sum
assured and paid-up future benefits, Irdai has specified a maximum spread of 50
basis points (bps) over 10-year G-Sec.
The applicable special surrender value shall be
reviewed annually based on the prevailing yield on 10-year G-Sec, the regulator
said.
How much money will you get back if you surrender your insurance policy?
Abhishek Kumar, a
SEBI-registered investment adviser and Founder of SahajMoney.com said,
"According to the earlier rules, 50% of total premiums must be paid if a
policy surrendered between the fourth and seventh years. You would have got Rs
1.2 lakh back (50% of the total premium of Rs 2 lakh and a bonus of Rs 40,000)
if you had left the policy after four years, according to previous surrender
value norms. With this special surrender value norm now, you will get back Rs
1.55 lakh."
If you exit life insurance after one year, you will get higher surrender value
Till now, if a
policyholder exits a life insurance policy after one year, he would have lost
his entire premium. With the new special surrender value norm, policyholders
will be eligible to get a refund even if they leave after the first year.
According to the regulator, "SSV calculated as above shall become payable
after completion of first policy year provided one full year premium has been
received." IRDAI added, "Provided for policies with limited premium
payment term of less than five years and single premium policies, SSV shall
become payable immediately after receipt of first full year premium or single
premium, as applicable."
Vivek Jain, Head - of
Investments, Policybazaar.com, said, "The provision for higher surrender
value (SV), calculated at a prevailing 10-year government securities rate with
a limited spread, significantly increases the value returned to policyholders
in the event of a policy surrender, after the completion of the first
year."
Let's consider another
example. A policyholder bought a 10-year policy with a sum assured of Rs 5
lakh. He pays a hefty premium of Rs 50,000 in the first year. Now if he leaves
the policy after one year, he would not have gotten any refund from the
insurer. He would have lost Rs 50,000. But according to the latest norms, he
will be eligible for a refund even if exits the policy after a year. If the
insurer has received the premium for the full year, they have to return Rs
31,295 to the policyholder, Kumar added.
How will the policyholder know about their special surrender value?
The regulator has asked
the insurer to mention policy-wise guaranteed surrender values (GSV), special
surrender value (SSV) and payable surrender values separately in the benefit
illustration. It is now mandatory for the insurers to provide a customised benefit
illustrations to prospective policyholders along with a prospectus while
selling a policy. The benefit illustration must be signed by both the potential
policyholder and the insurance agent, intermediary representative, or insurer
employee involved in the sales process. This signed document will become part
of the policy document, the regulator said.
So, you need to check the
policy benefit illustration carefully to understand guaranteed surrender values
(GSV), special surrender values (SSV) and surrender values that will be paid
when you return the policy.
Irdai asked insurers to implement this special
surrender value rule by September 30, 2024.
Life insurance new rules: Who gets the benefit of special surrender value norms?
This move is in favour of
the policyholders. Those who are stuck with the wrong product due to rampant
mis-selling that has become quite prevalent in the insurance sector will get a
higher amount back now.
The new surrender value norms introduced by
Irdai will apply primarily to new endowment policies issued after the
implementation of the guidelines, says Rakesh Goyal, Director
Probusinsurance.com.
