Life insurance policyholders to get higher early-exit payouts from today

From 1 October 2024,  a policyholder will get a higher refund if he exits his life insurance policy during the initial years.This is expected to provide greater flexibility and liquidity for life insurance customers who want to switch policies.

 Previously, surrendering a life insurance policy within the first year meant losing your entire premium. This could be a significant financial setback, especially if you were mis-sold the policy or faced unforeseen circumstances. However, things have changed with the introduction of the new Special Surrender Value (SSV) regulations by the Insurance Regulatory and Development Authority of India (IRDAI).

 According to the revised norms by insurance regulator Irdai, life insurers have to pay an enhanced special surrender value (SSV) after the completion of the first policy year provided the customer has paid one full-year premium. So far, companies did not pay such an amount to customers surrendering their policies in the first year.

A surrender value in insurance is the amount paid by the insurers to a policyholder, if he or she terminates the policy before its maturity date. If the policyholder surrenders during the tenure of the policy, the earnings and savings portion will be paid to him or her.

Additionally, the norms stated that the discount rate for discounting the paid-up value to calculate SSV will be allowed up to 50 basis points (bps) higher than 10-year G-Sec yield.

Unlike now, when policyholders lose the entire premium paid if they  exit after year one, once the new policy kicks in, they will get a part of their premium back. For insurers, their margins in the non-participating, guaranteed-return category of endowment plans will be the most affected. There will be no change in the surrender value of unit-linked insurance policies and pure protection term covers.

Key Changes:

Enhanced Special Surrender Value (SSV): Policyholders who surrender their policies after the first policy year will receive a higher SSV compared to previous rules.

Calculation Formula: The SSV must be at least equal to the present value of the paid-up sum assured, future benefits, and accrued/vested benefits, minus any survival benefits already paid.

Discount Rate Adjustment: The discount rate used to calculate SSV has been increased by up to 50 basis points, resulting in higher payouts.

A policyholder who purchases a non-par endowment policy with an annual premium of Rs 1.2 lakh, a five-year premium paying term, and a tenure of 10 years will now receive Rs 1.06 lakh if they surrender after paying the first premium. Under the previous rules, the policyholder would have received nothing.

How it Works:

 IRDAI specifies that the SSV calculation considers factors like the paid-up sum assured, future benefits, accrued bonuses, and survival benefits (if any), minus any already paid survival benefits. The interest rate used for this calculation cannot exceed the current yield on 10-year government securities (G-Secs) plus an additional 50 basis points.

Benefits for Policyholders:

• The revised rules offer greater flexibility to policyholders who may face financial difficulties.
•  Policyholders who are forced to surrender their policies will experience a less severe financial loss.
• The new regulations aim to protect policyholders from unfair practices and provide them with more favorable terms.

Impact on Life Insurance Companies:

• Product Revisions: Life insurance companies had to revise their existing products to comply with the new regulations.
• Deadline Extension: While companies sought a three-month extension, IRDAI maintained the original deadline.
• Commission Adjustments: The new norms may impact commission structures for distributors.
• Internal Rate of Return (IRR): The IRR for customers may be affected due to changes in interest rates and surrender value calculations.