The Insurance Regulatory and Development Authority of India (IRDA) has mooted a higher surrender value and lower charges for life insurance companies.
An exposure draft released by the insurance regulator pitched for a significant increase in the surrender value specifically for non-participating insurance products. Some modifications have also been suggested in the calculation of surrender charges.
In insurance policies, ‘surrender’ indicates the voluntary conclusion of a life insurance policy opted by the policyholder prior to its maturity or before the occurrence of the insured event.
This will result in the cessation of premium payment and the policyholder’s insurance cover. However, as the policyholder ewould have paid some premium before surrendering the policy, a life insurance company is mandated to provide a specific surrender value to the policyholder.
“There shall be a premium threshold defined for each product, wherein, there shall not be any surrender charges imposed on the balance of the premiums beyond such threshold limits, irrespective of the timing of the surrender,’‘ the exposure draft said. There are variations in the threshold defined among the different products depending on their nature and design.
Policyholder surrender value calculation
For example, consider a non-linked savings insurance policy with an annualised premium of ₹1,00,000 and a policy term of 20 years. Assuming a threshold limit of ₹25,000, the adjusted guaranteed surrender value after payment of third annualised premium can be determined as ₹25,000 x 3 x 35% = ₹26,250
The Premium refund beyond threshold premium can be: ₹(1,00,000 – 25,000) x 3 = 2,25,000 while the Adjusted Guaranteed surrender value: (i) +(ii), i.e. ₹2,51,250.
The surrender value would be the higher of the Adjusted Guaranteed Surrender Value or the Special Surrender Value. Thus, if the proposal is implemented, there will be a significant jump in surrender value because as per the existing regulations, one is eligible for 35 pc of the premium paid, equivalent to ₹1,05,000. It has been proposed to introduce a defined premium threshold for each product, beyond which no surrender charges will be levied.
The proposed augmentation of surrender values is likely to adversely impact the profit margins of non-participating products.
As per the existing norms, a policy can be surrendered at any time during the policy term, provided two full years’ premiums have been paid. However, in the first year , the regulator now proposes to offer Adjusted Surrender Value to the policyholder.