Learn About IRDAI's New Rule from October 2024, Mandating Insurers to Increase the Surrender Value of Life Insurance Policies, Offering Better Financial Security
for Policyholders.
Life insurance in India is set to undergo a significant change from 1st October 2024. The Insurance Regulatory and Development Authority of India (IRDAI) has mandated all insurers to increase the special surrender value of traditional endowment life insurance policies. This new regulation brings positive news for policyholders, making life insurance more attractive offering higher returns, flexibility to switch plans.
What
is Surrender Value?
Surrender value is the amount a
policyholder receives if he decides to exit his life insurance policy before
its maturity for nonpayment of premiums. Typically, when someone cancels there are policy early, they are being forfeited from many of the benefits. The surrender
value is often less than the total premiums paid, discouraging early exits.
The new rule by IRDAI is set to
improve this aspect by ensuring that policyholders get a better return when
they opt to surrender their policies. Let's explore how to calculate the
Special Surrender Value (SSV):
In a circular, the Insurance
Regulatory and Development Authority of India (IRDAI) dated June 12, 2024 said
that the special surrender value should be at least equal to the present value
of paid up sum assured of all contingencies covered and paid up all future
benefits like income benefits if any, and vested or accrued benefits if duly
allowing survival benefits whatever the title may be.
The paid up value is calculated as
per the following formula: Number of premiums paid × Sum assured ÷Total number
premiums due.
How Much Will a Person Get if he Surrenders his Policy
Before Maturity?
If a person surrenders his insurance
policy in between 4th and 7th years, as per the earlier rule he would have got
50% of the total premiums. Suppose total premiums paid are Rs.2 lakh bonus is
50000.The value of return was 50% of Rs.2 lakh and 50000 bonuses, it is Rs.1.25
lakh as per the previous rule. The present rule will enable the person to get
Rs.1.61 lakh.
If the person surrenders his policy
after 1 year, as per the earlier rule he would have lost his total premium. But
as per the new rule the person is entitled to get refund of his paid up premium
as per formula.
Impact of the New Rule
As the new rule will
give some benefits to the policy holders, but there will be an increase of
financial burden on the shoulders of the insurance companies which will be a
concern for them. So, the insurers are taking some steps to combat this burden.
For example: LIC is increasing premiums on various policies. Along with this
it is also eliminating the special rider for critical illness which the
endowment policy was already attached with. Next the commissions of the agents
are to be decreased which will be a negative effect for the agents to sell new policies. At the same time, LIC has said that it will introduce Rs.2 lakh
endowment policy instead of Rs.1lakh earlier.
LIC-Agents Federation, an organization of the agents has alleged that the steps taken by LIC to reduce the additional financial burden will hit the sale of various schemes.
