Life Insurance policies to offer higher surrender value on premature exit

Mumbai: From October 1, life insurance companies will pay you a surrender value even if you surrender your policy after completion of the first policy year. The Insurance Regulatory and Development Authority of India (IRDAI) in its final master circular on life insurance products, has also significantly reduced surrender charges on traditional savings plans.

The norms also require that the discount rate for discounting the paid-up value to calculate Special Surrender Value (SSV) can be up to 10-Year G-Sec yield plus 50 basis points versus the 10-Year G-Sec yield in the earlier norms. The insurers can continue to sell the existing products up to September 30, 2024, after which they will have to mandatorily sell the products complying with this circular.

The new norms state that “Special Surrender Value (SSV) calculated shall become payable after completion of the first policy year provided one full year premium has been received.” Until now, policyholders earned surrender value only if two full years premiums have been paid.

Surrendering a policy means completely withdrawing or terminating the insurance policy contract. Surrender Value means an amount, if any, that becomes payable on surrender of a policy during its term. If you decide to leave your policy midway, the surrender charges could be steep for both participating and non-participating plans. While you lose your money invested as surrender penalty to the insurer, it shores up the profitability of your insurer. Policy surrender in the second and third year would lead to 70 per cent of policy corpus being appropriated as surrender charges by life insurers and boosting their lapsation profits. Similar action in the fourth and fifth year can lead to roughly 50 per cent of your corpus being charged off.

According to analysts of Emkay, insurers can move ahead by making adjustments to offset the impact of higher payouts to the surrendering policyholders in non-par saving products by slightly reducing the guaranteed rate; moving to a trail-based commission or adding clause of first-year commission claw back (partly or fully) in case of early surrenders besides taking some hit on their margins.”

Shrikant Chouhan, head Equity Research at Kotak Securities said, “Based on our preliminary calculations, surrender income (for life insurers) could decrease by approximately 55-70 per cent. It's too early to quantify the impact on the Value of New Business (VNB) margin, as insurance companies might offset this by adjusting distributor terms or making changes to internal rate of return (IRR) calculations.”

The IRDAI has clarified that life insurers can offer a higher Guaranteed Surrender Value (GSV) than those mandated by its provisions. While this value will vary depending on the premium size, policy term, premium paying term and other relevant factors, life insurers are expected to be reasonable and deliver value for money for both continuing and surrendering policyholders while deciding on the quantum GSV increase for different insurance products being offered by them said Alok Rungta, MD & CEO of Future Generali India Life Insurance Company Ltd.