Irdai bats for easier exit from traditional plans; no change in returns

Draft guidelines propose higher sum as well as some bonus, if premiums are paid for two consecutive years

The Insurance Regulatory and Development Authority of India (Irdai) had recently put out draft product guidelines to review and standardise the 2013 regulations on linked and non-linked insurance products. 

Though not much has been drafted to improve the returns from policies, there are proposals to make the exit route easier for policyholders. For example, the new draft regulation has proposed guaranteed surrender values, along with any accrued bonus, if premiums are paid for at least two consecutive years in case of traditional plans, irrespective of the original policy tenure. 

In addition, there is also a proposal to increase the minimum guaranteed surrender value payable in case of policy surrender between second year and third year, to 35 per cent of the total premiums paid from the current 30 per cent. In case of a participating policy, the bonus also gets attached to it.

Says Rajeev Chugh, chief financial officer of Aegon Life Insurance: "While the existing regulation does not have any mandate regarding surrender value of the accrued bonus, the draft regulation has also proposed a minimum surrender value of 30 per cent for the subsisting bonus."

He adds: "The actual surrender value payable under a policy has a direct relationship with the policy year in which a policy is surrendered; the later one surrenders a policy, the higher is the surrender value." Hence, a policyholder will receive the maximum surrender value in case the policy is surrendered near the maturity date. The draft regulation has defined a minimum guaranteed surrender value of 90 per cent of the total premiums paid as the policy approaches maturity.

Experts believe this will increase the attractiveness of traditional plans. Says Rakesh Goyal, director, Probus Insurance Broker: "One should not buy a traditional policy with a thought of surrendering it during the policy term. Even after the guidelines, the traditional products will remain opaque and fetch low returns. Surrender value is always proportionately lower; hence, they are usually not recommended." However, if you wish to discontinue your insurance policy for any reason, you can do so. There are two broad options: you can either convert it into a paid-up policy without exiting, or you can surrender it.

So, if you are near to the maturity date of your policy with over three-five years more to go, it is wiser to hold on instead of exiting. The returns in a traditional life insurance policy are generally around 4-6 per cent annually, if continued till its maturity. Adds Goyal: "If you plan to exit a policy and wish to reinvest the proceeds in an alternative investment, you must be sure that the new option would earn superior returns and has the potential to recover the losses incurred in exiting the policy."

The surrender value, however, of an insurance policy mostly depends on the type and terms of the policy. And this varies from one insurer to another. There are no charges levied on policyholders if the premiums for the policies have been paid regularly for five years. The amount is payable only if you have paid consecutive premiums for three full years (if premium paying term is more than 10 years) and two years (if premium paying term is less than 10 years). 

Surrendering of traditional plans is not recommended by experts as the policyholders get full benefits of traditional plans only when they continue the policy for the full tenure. "However, the draft regulation proposes better surrender values in case of an urgent need for policy surrender, benefiting policyholders," adds Chugh.

Draft proposals by IRDAI
 

• Policyholder can acquire guaranteed surrender value after two years.
• Minimum death benefit seven times across all ages
• Policyholders can now keep up to 60 per cent of the sum assured on maturity
• Extention of the revival period of policies to five years
• For single premium policies, the minimum guaranteed surrender value increased to 75 per cent from the current 70 per cent

                       Source: IRDAI circular