Proposed Irdai Abandoning life insurance policies before their term concludes often results in substantial financial setbacks due to steep surrender charges in the initial policy years. Recognizing this, the Insurance Regulatory and Development Authority of India (Irdai) unveiled proposals aiming to boost the surrender value of non-linked policies through an exposure draft issued on December 12. Non-linked policies, also known as traditional insurance plans, operate independently of the stock market, offering low-risk returns, a defined maturity amount, and bonuses.
Premium Proposed Irdai
Irdai’s draft regulations introduce the concept of a premium threshold for each product. Beyond this threshold, regardless of the surrender timing, no surrender charges would be imposed on the remaining premium. Stakeholders are encouraged to provide feedback on the proposed regulations by January 3.
For instance, let’s consider an endowment policy with a Rs. 1 lakh annual premium and a 20-year term. Assuming a threshold limit of Rs. 25,000, the guaranteed surrender value after the third annual premium payment could be computed as follows:
Premium Refund Proposed Irdai
The guaranteed surrender value for the threshold premium, multiplied by the number of premiums paid and 35%, totals Rs. 26,250. Additionally, the premium refund beyond the threshold premium amounts to Rs. 2,25,000, resulting in an adjusted guaranteed surrender value of Rs. 2,51,250, considering the higher of the two values.
This stands as a significant surge from the existing regulations where one would qualify for 35% of the premium paid, equating to Rs. 1,05,000.
Presently, policies can be surrendered during the term if two full years’ premiums have been paid. Surrendering before this incurs substantial costs, yielding no refund. Beyond two years, policyholders are entitled to the Guaranteed Surrender Value, which carries substantial costs. For instance, surrendering after the second or third year refunds 30-35% of the total premium, excluding bonuses, with this proportion increasing over the policy term.
The proposed Irdai regulations even offer an Adjusted Surrender Value for policies surrendered in the first year. For instance, in a non-linked savings insurance policy with a Rs. 1 lakh annualised premium and a 20-year term, if surrendered in the first year, the adjusted guaranteed surrender value after the initial annualised premium payment might total Rs. 75,000.
While surrendering a policy might seem like an easy fix, it bears significant financial implications. Irdai’s proposed regulations aim to ease this burden, aiming to provide a fairer and more equitable approach for policyholders seeking an exit from their policies.