Surrender value is the amount which the policyholder gets if he stops paying premiums. Insurance companies were paying only a small amount as surrender value towards discontinued policies.
Life insurance policyholders are set to get a higher refund amount if they discontinue their policies in the wake of the new rules mandated by the Insurance Regulatory and Development of India (IRDAI) from October 1.
IRDAI has said in a circular that every policy offered by life insurer under a non-linked platform which has acquired a surrender value should not lapse by reason of non-payment of further premiums. It should be kept in force to the extent of paid-up sum assured, calculated by means of a formula as approved by the Authority and the reversionary bonuses or the guaranteed additions, if any, that have already been attached to the policy, IRDAI said. This means policyholders will get a higher refund amount for discontinued policies as per the new calculation approved by the regulator.
Surrender value is the amount which the policyholder gets if he stops paying premiums. Insurance companies were paying only a small amount as surrender value towards discontinued policies. Product and commission structures are likely to witness significant changes, leading to volatile premium movement in the second half of the current fiscal. However, as these changes are anticipated to be favourable for customers, the growth is likely to rise over the medium term, rating firm CareEdge said.
As of now, policyholders don’t issue any refund amount if the policy is discontinued or lapsed for non-payment of premium after one year. Now they will get almost 80-85 per cent of the premium paid after one year. If the policyholder has paid a monthly premium of Rs 20,000 (Rs 240,000 for one year), he/ she will get slightly over Rs 2 lakh as surrender value. Till now, it was zero refund for one year.
After the customer pays premium of Rs 20,000 per month for two years, he/ she will get over Rs 4.50 lakh as against the premium paid of Rs 4.80 lakh. As per the existing formula, policyholders get only around Rs 2.50 lakh for discontinued policies. The surrender value will increase for subsequent years accordingly and policyholders will get as much as 85 per cent of the premium paid.
Furthermore, policyholders can switch the insurers, making portability easier without losing much money.
The higher surrender value is likely to result in a spike in premium by insurers. Some insurers had taken up the hike in surrender value to IRDAI asking the regulator to review the decision. Insurance funds are supposed to be long-terms funds lasting for 20 to 25 years. If the insurer shells out higher surrender value, it could impact its margins and profitability, according to an insurance source.
Insurance companies also say that high surrender value is against the interest of policyholders who are sticking to the policies. They fear a jump in their profit margins and expenses. “There’s a possibility that insurers will jack up premiums to account for the rise in surrender value. The new rule will force insurers to perform well and avoid surrenders,” said an insurance official.
