IRDAI release draft for increasing surrender value of non-par products

Don't want to miss the best from Business Standard?

The Insurance Regulatory and Development Authority of India (IRDAI) has released an Exposure Draft proposing to increase the surrender value of non-linked life insurance policies. The surrender value is the amount that the policyholder receives from the insurance company if they decide to terminate their policy before its maturity.

The insurance regulator has proposed a high surrender value on non-participating insurance products, which is likely to have a negative impact on the margins of companies which are non-participating heavy.

Also, the IRDAI has proposed a premium threshold for each product. According to them, beyond a certain limit, no surrender charges would be levied on the remaining premium, irrespective of when the policy is surrendered.

Under the present regime, the policy can be surrendered by the policyholder during the policy term if two full years’ premiums have been paid. However, no money will be refunded if the policy is surrendered before these years.

Giving an example of the proposed changes, IRDAI noted that in a Non-Linked savings insurance policy with an annualised premium of Rs 100,000 with a policy term of 20 years. Assuming a threshold limit of Rs 25,000, the adjusted guaranteed surrender value after payment of the third annualised premium may be as follows: i. Guaranteed Surrender value for threshold premium: Rs 25,000 x 3 x 35% = Rs 26,250 ii. Premium refund beyond threshold premium: Rs (1,00,000 – 25,000) x 3 = Rs 2,25,000 iii. Adjusted Guaranteed surrender value: (i) +(ii), i.e. Rs 2,51,250. iv. Surrender value shall be higher of (Adjusted Guaranteed Surrender Value, Special Surrender Value)

A Non-Linked savings insurance policy with an annualised premium of Rs 100,000 and a policy term of 20 years. Assuming a threshold limit of Rs 25,000, if the policy is surrendered in the first policy year, the adjusted guaranteed surrender value after payment of the first annualised premium may be as follows: i. Guaranteed Surrender value for threshold premium: Zero ii. Premium refund beyond threshold premium: Rs (1,00,000 – 25,000) x 1 = Rs 75,000 iii. Adjusted Guaranteed surrender value: (i) +(ii), i.e. Rs 75,000 iv. Surrender value shall be higher of (Adjusted Guaranteed Surrender Value, Special Surrender Value)

All individual non-linked savings and protection-oriented products such as non-linked life insurance products, and non-linked pension products including deferred annuity products, other than pure risk premium products such as term insurance, health insurance, and immediate annuity products, shall acquire a guaranteed surrender value.

Guaranteed surrender value (GSV) is a minimum amount that an insurance company pays to the policyholder upon surrendering the policy, which is determined at the time of purchase of the policy.

Special Surrender Value (SSV) is the amount which is offered at the discretion of the insurance company, over and above the GSV. The SSV takes into account various factors such as the policy duration, the number of premiums paid, the current market conditions, and other such factors.

According to analysts, HDFC Life Insurance and Max Life Insurance, held by Max Financial Services, some of the non-participating heavy life insurers, saw a decline in the stock market. HDFC Life Insurance ended 1.75 per cent down at Rs 686 and Max Financial Services 3.16 per cent down at Rs 1023.50 on the National Stock Exchange on Thursday.