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Life insurance rule change: Starting from October 1, 2024, an insurance policy owner will receive a greater refund if they decide to surrender their policy

Submitted by admin on October 1st, 2024

From next month, the life insurance policyholder will receive a better refund if he leaves his policy in its initial years. Indian Insurance Regulatory and Development Authority (Irdai) have expected the insurance companies to enhance the special surrender value (SSV) of traditional endowment policies from October 1, 2024. They expect this to afford enhanced mobility and market liquidity for the life insurance client base who seek to change contracts.

There have been some reports that the insurers including the LIC asked Irdai to alter surrender value regulation and seek more time to align with the directions. But there is no specific notification or announcement from Irdai that the regulator has accepted their application. Lacking such an extension, insurance companies will be bound by the regulations of special surrender value that will be implemented from October 1, 2024.

But under this new surrender value rule, which you need to understand as a life insurance policyholder, it will be calculated this way. What do you get back if your life insurance policy is stopped after one year? To answer all your questions on the new special surrender value rule proposed by Irdai, ET Wealth Online has decoded the new system for you.

Life insurance new rule: How is the special surrender value come about?

In a master circular for life insurance business dated June 12, 2024, the Irdai has said that the special surrender value should be at least equal to the present value of.

Grants (a) paid-up sum assured on all contingencies covered and

(b) paid-up future benefits, if any, pensions other than lump sum and death benefits, any future income benefits,

appropriately, for survival benefits already paid (whatever the name given to such other benefits), if any; and (c) other accrued/vested benefits

Paid-up value is calculated as per a formula: simply means, the number of premiums paid multiplied by the sum assured or divided by the total number of premiums payable. The target incremental value is then obtained as the expected present value of paid-up sum assured and paid-up future benefits, subject to a maximum spread of 50 bps over 10-year G-Sec.

The applicable special surrender value is to be recalculated every year in terms of the yield on 10-year G-Sec, the regulator added.

What amount of cash guaranteed will be returned on the occasion that you give up the insurance policy?

Abhishek Kumar, a SEBI registered Investment Adviser and the founder of SahajMoney.com said, “The new rules state that if a policy was surrendered between the 4th and 7th year, then 50% of total premiums have to be paid. Earlier there were norms for surrender value, if you had left the policy after four years you would have received Rs 1.2lac (50% of the total premium of Rs 2lac and a bonus of Rs 40,000). “With this special surrender value norm now, Rs 1.55 lakh would be returned.”

In case you terminate the contract from the life insurance policy one year or before that then you will be offered high surrender value.

Until now, if a policyholder wanted to quit out of a life insurance policy after one year, then he would be out of his overall premium. With the new special surrender value norm, policyholders will be able to get a refund even if they terminate it, although after the first year. The regulator has said that SSV calculated as above shall become payable after completion of first policy year where one full year premium has been received. IRDAI also stated, “For the policies where the premium paying term is restricted to less than five years and for single premium policies the SSV shall become payable in the immediate next policy period on receipt of first full year premium or single premium, as the case may be.”

Vivek Jain, Head – of Investments, Policybazaar.com, said, “The provision for higher surrender value (SV), calculated at a prevailing 10-year government securities rate with a limited spread, significantly increases the value returned to policyholders in the event of a policy surrender, after the completion of the first year.”

Concerning the special surrender value, how will the policyholder ever come to learn that special surrender value exists?

The regulator has suggested that the insurer should report any policy-wise GSV, SSV and PVs as separate from benefit illustration. It has made it compulsory for the insurers to issue a benefit illustration statement with regard to every policy to be sold, to the interested policyholder or a prospectus as the insurers may choose to term it. The benefit illustration must be signed by the potential policyholder and insurance agent, intermediary representative or insurer employee who is in direct contact with the potential policyholder. This signed document will form part of the policy document, said the regulator.

Therefore, guaranteed surrender values are defined as GSV, special surrender values are referred to as SSV while surrender values that will be paid when the policy is surrendered are also determined.

To hedge and manage risks, ordinary non Linked insurance policies were required by Irdai to be implemented with this special surrender value rule before September’30, 2024 and new linked insurance policies having surrender value before March’31, 2022.

Life insurance new rules: Thus to whom do special surrender of value norms get accorded?

This change is in the policyholder’s best interest. Kaukau will receive more for their money now, especially those who are stuck with the wrong product courtesy of]))

mis-selling that has become a common vice in the insurance sector.

The new surrender value norms which has been set by Irdai will impact mostly the new endowment plans that was got after the implementation of the said guidelines said Rakesh Goyal the Director Probusinsurance.com.