The Insurance Regulatory and Development Authority of India (IRDAI) has come out with final regulations in relation to surrender value of insurance policies. As per the latest IRDAI guidelines set to be implemented from April 1, surrender values for life insurance policies are anticipated to generally maintain their current levels or potentially decrease if policies are surrendered within the initial three years. However, surrendering life insurance policies between the fourth and seventh years may result in a slight increment in surrender value.

“IRDAI’s final regulations on surrender value strike a commendable balance. This empowers customers to make informed decisions about their financial security without significant penalty if their circumstances change,” informed Sanjiv Bajaj, Jt. Chairman & MD, BajajCapital.

(It may be noted that surrender value is the amount paid by the insurance company to the policyholder upon terminating the policy before the maturity date.)

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The surrender value percentages are structured as follows:

  • 30% of total premiums paid if surrendered during the second year.
  • 35% of total premiums paid if surrendered during the third year.
  • 50% of total premiums paid if surrendered between the fourth and seventh years.
  • 90% of total premiums paid if surrendered during the last two years

Importantly, the impact on life insurers is expected to be minimal. The finalized regulations avoid the initially proposed high surrender values, which could have decreased Internal Rate of Returns (IRRs) for policyholders.

“IRDAI has emphasized that for non-linked insurance products, benefits in savings plans must be guaranteed with a specific amount at the policy’s outset, ensuring policyholders have clear expectations about their benefits. Regarding savings products, excluding those with the return of insurance premium clause, IRDAI has highlighted the importance of guaranteeing survival and maturity benefits, ensuring policyholders receive a positive return, thus deriving value from their savings plans,” said Bajaj.

Furthermore, the regulator has clarified that pension products provided to individual customers must offer specific assured benefits, which may be disbursed in the event of death or any covered health contingency.

Moreover, under non-linked pension products, assured benefits should be disbursed upon vesting, except in the case of linked pension products where the payment of defined assured benefits upon vesting is discretionary.

Thus, effective from April 1 onwards, the surrender value of policies shall either decrease or remain the same if surrendered within three years of their initiation. Conversely, policies surrendered between the fourth and seventh years may witness a modest increment in their surrender value.

Commenting on the IRDAI regulations, Adhil Shetty, CEO, Bankbazaar.com, said, “To bolster insurance penetration and augment transparency for consumers, the IRDAI has brought regulations, encompassing provisions regarding surrender charges and requisite disclosures of the same to customers. These newly-instituted regulations are designed to foster good governance pertaining to pricing mechanisms and to ensure the provision of guaranteed surrender value, coupled with comprehensive disclosures to policyholders. These steps are likely to act as a booster for the sector and make it a win-win situation for customers and insurance issuers.”

Echoing similar views, Rahul M Mishra, Director & Co-founder, Policy Ensure, said, “The IRDAI’s new guidelines are a balanced approach to maintaining the financial stability of the insurance sector while also providing fair surrender values to policyholders. The decision to keep surrender values largely unchanged for policies surrendered within three years is prudent, as it discourages premature termination of policies and ensures that the insurers’ liabilities are manageable. On the other hand, the slight increase in surrender values from the fourth to the seventh year is a welcome move for policyholders who have shown a commitment to their policies for a longer duration. Overall, these guidelines reflect a thoughtful consideration of both the insurers’ and the insureds’ interests.”