Irda mulls friendlier rules for life cover surrender

Regulator proposes guaranteed value on giving up a traditional policy

There might soon be a lesser penalty on customers wishing to surrender traditional insurance policies.

The Insurance Regulatory and Development Authority (Irda), in revised draft guidelines on the design of life insurance products, has proposed a minimum guaranteed surrender value for traditional policies, significantly higher than what is being practiced by insurers.

Accordingly, an insurer will have to pay back at least the premium amount if a policy has been active for more than seven years. Policy holders would get back as much as half their premiums if a policy has been active for at least three years.

In the revised draft, Irda has proposed all individual non-linked life insurance and pension products shall acquire a minimum guaranteed surrender value (GSV). Unit linked insurance plans already have a minimum GSV.

“The minimum guaranteed surrender value would be 50 per cent of the total premiums paid if policy is surrendered in the second and third year. If surrendered in the fourth year, it would be 75 per cent of the total premiums paid and if surrendered during the fifth to the seventh policy year, it would be 90 per cent of total premiums paid. If surrendered thereafter, it would be 100 per cent of the total premiums paid,” the draft norms said.

This would be applicable to products with a premium paying term of 10 years and more if all premiums have been paid for at least three consecutive years and less than 10 years if all have been paid for at least two consecutive years).

However, this would not be applicable to regular premium-paying, term pure-protection products such as term insurance, health insurance products and immediate annuities without death benefit.

Insurers will have to provide a benefit illustration for the insurance products, linked to benchmark indices. These products, named Index Linked Insurance Products (Ilips), will have benefits that clearly reflect the possible movements of the index to be linked and the value of the benefit to be guaranteed in such a scenario. For example, if there is a change of less than two per cent per annum on interest rates, the value of benefits assigned would be 0.25 per cent per annum of the policy account. Similarly, if there is a change of more than five per cent per annum on interest rates, the value of benefits assigned would be four per cent per annum of the policy account.

Irda has said loans shall not be allowed under Ilips.