Good news for life insurance policyholders! Now insurance companies will have to pay higher surrender value to the person insured on exiting the policy during initial years.
After multiple revisions in the past, the Insurance Regulatory and Development Authority of India (IRDAI) has come out with new updates on regulations regarding the surrender value of life insurance policies.
Earlier in December last year, the draft had proposed higher surrender values for policyholders. However, the final master circular, issued now, has lower surrender value than what was proposed earlier. The value, however, is still higher than the existing rate.
The IRDAI circular has made it clear that the special surrender value rule offers policyholders the opportunity to receive a portion of their premium back even if they exit from the policies after just one year. This IRDAI move is likely to boost liquidity and flexibility for life insurance customers who may wish to switch their policies.
The special surrender value calculation, however, will be based on several other factors including the policy’s term, premium paid, and the duration for which the policy has been active. The exact formula for calculation of surrender value may vary insurer to insurer as the value is arrived at by typically considering factors such as the total premium paid, policy duration, and the surrender charges applicable.
While deciding on the surrender value, insurers shall ensure reasonableness and value for money to all types of policyholders including surrendering policyholders and continuing policyholders, the circular said.
What does the IRDAI’s proposed special surrender value mean and how is it calculated?
In its master circular for life insurance business released on June 12, 2024, the regulator said that the special surrender value needs to be at least equal to the expected present value of the
(a) paid-up sum assured on all contingencies covered and
(b) paid-up future benefits (such as income benefits), if any, and
(c) accrued/vested benefits, duly allowing for survival benefits already paid (whatsoever name called), if any
SSV calculated as above shall become payable after completion of first policy year provided one full year premium has been received: Provided for policies with limited premium payment term of less than 5 years and single premium policies, SSV shall become payable immediately after receipt of first full year premium or single premium, as applicable.
What does surrendering a policy mean?
For those unfamiliar, surrendering a policy means you are fully withdrawing or terminating the policy before its actual term ends. The surrender value, which is paid to policyholders on surrender, is determined as the higher of the Guaranteed Surrender Value or the Special Surrender Value.
Until now, if you were surrendering your policies within two years of starting a policy, there was no provision to refund. But now if you buy a policy and pay the premium for one full year, you will be eligible for a refund of premium.