Invest Guide November 2024

Expect Bigger Refunds From October 1, 2024!

Surrendering a life insurance policy is a crucial decision that allows policyholders to terminate their coverage in return for cash. This procedure might result from a variety of factors, including financial demands, changes in living circumstances, or unhappiness with the policy. Understanding the consequences of surrendering a policy is critical since it might affect long-term financial planning and protection. Recent regulatory modifications by the Insurance Regulatory and Development Authority of India (IRDAI) aim to increase transparency and streamline the surrender process, ensuring that policyholders are well-informed and empowered to make the best decisions about their insurance coverage.

What is surrender value and what it meant earlier to policy holders?

As the name suggests, surrender value in insurance is the amount the insurance company pays to the policyholder when he/she decides to terminate the plan before its maturity date. As per the old IRDAI regulations, if the policyholder surrenders during the policy tenure, the earnings and savings portion will be paid to him or her. Surrender charges are deducted based on the terms of the plan. Surrender values typically are paid only after a policy has been active for a specified period of time, usually three to five years.

Reasons why policyholders choose to surrender their policies:

Policyholders may choose to surrender their life insurance policies for various reasons. Here are some common motivations -

1. Financial Need:
   Immediate cash needs due to emergencies, medical expenses, or other financial obligations can drive policyholders to surrender their policies for the available surrender value.
2. Dissatisfaction with Coverage:
   Some policyholders may believe that their current insurance no longer fulfils their needs, either owing to changes in personal circumstances or financial aspirations.
3. Discovery of a better plan:
   Policyholders may find better investment opportunities that align more closely with their financial goals, leading them to liquidate their insurance policies.
4. Migration or Relocation: Moving to another country or region may result in a need to reassess existing insurance coverage, leading to policy surrenders if local options are more favourable.
5. Tax Considerations:
   In some cases, policyholders may surrender their policies for tax planning purposes, especially if they believe the tax implications of surrendering outweigh the benefits of keeping the policy.

The year 2022-23 saw a surge in the surrenders and withdrawals of life insurance policies. It had increased by 25.62 per cent to Rs 1.98 lakh crore compared to Rs 1.29 lakh crore in 2021-2022. The jump has been attributed to several factors ranging from rise in inflation and issues related to mis-selling of insurance policies.

IRDAI rules on surrender value - Then and now

Before the introduction of the new rules by the IRDAI on October 1, 2024, the regulations regarding the surrender of life insurance policies were less transparent and often varied significantly among insurers. Here are some key aspects of the old rules -

1. Limited Disclosure -
   Insurers did not always give clear information on surrender values at policy issuance or during the policy term, causing confusion among policyholders.
2. Complex Procedures -
   The process for surrendering a policy could be cumbersome, often involving extensive paperwork and lengthy approval times.
3. Variable Waiting Periods -
   Some policies had different waiting periods for surrender, which were not uniformly applied or clearly communicated to policyholders.
4. Ambiguous Penalties -
   Information regarding penalties for surrendering a policy, such as reductions in benefits or cash values, was often not clearly stated, making it difficult for policyholders to understand the full financial impact.
5. Limited Digital Options -
   Many insurers had limited digital processes for submitting surrender requests, which could delay the overall process.
6. No Surrender value -
   Under the old guidelines, policyholders were typically required to pay at least two full years of premiums before being eligible to surrender their life insurance policies. In addition to this, no surrender value was offered during the first year, which meant that if a policyholder chose to sell their policy within the first 12 months, they would not get any monetary value.

Effective October 2024: A Game-Changer for Life Insurance Surrender Refunds!

Starting October 1, 2024, a significant change in life insurance regulations empowers policyholders by offering higherrefund amounts upon surrendering their policies. According to the new regulations laid down by IRDA, life insurers are required to repay a higher amount to a policyholder who chooses to switch or surrender their insurance. According to the regulation, any insurance sold by a life insurer under a non-linked platform that has a surrender value should not lapse due to a failure to pay additional premium. It should be valid for the amount of the paid-up sum assured, computed using a formula approved by it, as well as any reversionary bonuses or guaranteed additions previously linked to the policy.

Let us understand the new policy how much money will you get back if you surrender your insurance policy :

An insurance expert 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.” Which includes 50% of the total premiums paid (Rs 1 lakh) in addition to increased or accrued bonuses of Rs 55,000.

According to the new guidelines, insurers must ensure that the SSV (Special Surrender value) equals at least the present value of the paid-up sum assured, future benefits, and any accrued or vested bonuses, while also accounting for any survival benefits already paid. The interest rate used for these calculations cannot exceed the current yield on 10-year government securities (G-Secs) plus an additional 50 basis points.

Calculation of special surrender value as per new rule :

Overall, the new surrender value regulations are set to create a more favourable environment for policyholders, enhancing their financial security and providing them with the necessary tools to manage their insurance effectively. This shift represents a significant step toward a more customer-centric insurance market. The new regulations will go a long way toward protecting client interests, fostering good governance making insurers more professional, and reducing misselling, which is one of the most serious issues afflicting the insurance industry.