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 insurance regulator has proposed a high surrender value on non-participating insurance products. Also, the regulator 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, 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.
Other than single premium products, The policy shall acquire a guaranteed surrender value on payment of premium for at least two consecutive years. The guaranteed surrender value shall be at least: i) 30% of the total premiums paid less any survival benefits already paid, if surrendered during the second year of the policy, and ii) 35% of the total premiums paid less any survival benefits already paid, if surrendered during third year of the policy; iii) 50% of the total premiums paid less any survival benefits already paid, if surrendered between the fourth year and seventh year of the policy, both inclusive; iv) 90% of the total premiums paid less any survival benefits already paid, if surrendered during the last two years of the policy; v) The surrender value beyond the seventh year shall follow a smooth progression and converge to at least 90% of the total premiums paid less any survival benefits already paid, as the policy approaches maturity.
Guaranteed surrender value for Single premium products shall be at least: i) 75% of the total premiums paid less any survival benefits already paid, if surrendered any time within third policy year; ii) Subject to (iii), 90% of the total premiums paid less any survival benefits already paid, if surrendered in the fourth policy year.
iii) 90% of the total premiums paid less any survival benefits already paid, if surrendered during the last two years of the policy; iv) The surrender value beyond the fourth year shall follow a smooth progression, and converge to at least 90% of the total premium paid less any survival benefits already paid as the policy approaches maturity.
Guaranteed Surrender Value (GSV) is the minimum amount paid by the insurance company to the policyholder upon surrender of the policy, which is determined at the time of purchase of the policy.
Special Surrender Value (SSV) is an amount paid at the discretion of the insurance company above the Guaranteed Surrender Value (GSV). SSV takes into account various factors like policy tenure, number of premiums paid, current market conditions and other 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.
The proposal, if implemented, shall benefit policyholders who cannot continue their policies for more than a few years.
However, insurers may suffer as their margins shall decrease. An insurance executive said a higher surrender value would adversely affect the persistency ratio of 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.
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