If a policyholder wants to exit his life insurance policy during the initial years, he will get a higher refund from the insurance company now. After several rounds of discussions and proposals, the Insurance Regulatory and Development Authority of India (IRDAI) has ordered a higher special surrender value (SSV) for traditional endowment policies. Now, the policyholder will get a part of his premium back even if he exits after one year. This will indeed offer more liquidity and flexibility to life insurance customers if they want to switch their policies, said many experts. What is the special surrender value rule proposed by the IRDAI? How will it be calculated? How much will the policyholders get back if they prematurely exit their life insurance policies? Will the rule apply for existing endowment policies? ET Wealth Online explains it for you.
New IRDAI rule: How to calculate special surrender value of life insurance policy
In a master circular for life insurance business dated June 12, 2024, the IRDAI has said that the special surrender value should be at least equal to the present value of
(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 anyPaid-up value is calculated as per a formula: number of premiums paid X sum assured/total number of premiums payable. To arrive at the expected present value of the paid-up sum assured and paid-up future benefits, IRDAI has specified a maximum spread of 50 basis points (bps) over 10-year G-Sec.
The applicable special surrender value shall be reviewed annually based on the prevailing yield on 10-year G-Sec, the regulator said.
How much will you get if you prematurely exit life insurance?
Let us assume a policyholder pays an annual premium of Rs 50,000 for a 10-year policy with a sum assured of Rs 5 lakh. Now after four years he wants to exit the policy after four years. He has accumulated a bonus of Rs 40,000 till now. He has paid a premium of Rs 2 lakh in four years. Let us understand how much more he will get as per new surrender rule.
“According to the earlier rules, 50% of total premiums must be paid if a policy surrendered between the fourth and seventh years. You would have got Rs 1.2 lakh back (50% of total premium Rs 2 lakh and bonus is Rs 40,000) if you had left the policy after four years, according to previous surrender value norms. With this special surrender value norm now, you will get back Rs 1.55 lakh,” says Abhishek Kumar, a SEBI-registered investment adviser and Founder of SahajMoney.com.
Higher surrender value when you return policy after one year
Moreover, the policyholders will be eligible to get a refund even if they leave after the first year. Earlier, if a policyholder exits a life insurance policy after one year, he would have lost his entire premium. Now IRDAI has said, “SSV calculated as above shall become payable after completion of first policy year provided one full year premium has been received.” The regulator added, “Provided for policies with limited premium payment term of less than five years and single premium policies, SSV shall become payable immediately after receipt of first full year premium or single premium, as applicable.”
Let’s consider another example. A policyholder bought a 10-year policy with a sum assured of Rs 5 lakh. He pays a hefty premium of Rs 50,000 in the first year. Now if he leaves the policy after one year, he would not have gotten any refund from the insurer. He would have lost Rs 50,000. But according to the latest norms, he will be eligible for a refund even if exits the policy after a year. If the insurer has received the premium for the full year, they have to return Rs 31,295 to the policyholder, Kumar adds.
| Calculation of special surrender value as per new rule | |||||
| Annual Premium | ₹50,000 | 10-year G-Sec Yield | 7% | ||
| Sum Assured | ₹500,000 | G-Sec + 50 bps | 7.5% | ||
| Bonus (Full Term) | ₹100,000 | Policy Term | 10 | ||
| Year | Premium | Bonus | Paid-up Sum Assured + Accrued Bonus | Present Value | % of Premium |
| 1 | ₹50,000 | ₹10,000 | ₹60,000 | ₹31,295.01 | 62.59% |
| 2 | ₹50,000 | ₹10,000 | ₹120,000 | ₹67,284.27 | 67.28% |
| 3 | ₹50,000 | ₹10,000 | ₹180,000 | ₹108,495.88 | 72.33% |
| 4 | ₹50,000 | ₹10,000 | ₹240,000 | ₹155,510.76 | 77.76% |
| 5 | ₹50,000 | ₹10,000 | ₹300,000 | ₹208,967.59 | 83.59% |
| 6 | ₹50,000 | ₹10,000 | ₹360,000 | ₹269,568.19 | 89.86% |
| 7 | ₹50,000 | ₹10,000 | ₹420,000 | ₹338,083.44 | 96.60% |
| 8 | ₹50,000 | ₹10,000 | ₹480,000 | ₹415,359.65 | 103.84% |
| 9 | ₹50,000 | ₹10,000 | ₹540,000 | ₹502,325.58 | 111.63% |
| 10 | ₹50,000 | ₹10,000 | ₹600,000 | ₹600,000.00 | 120.00% |
Source: Abhishek Kumar, SEBI RIA and Founder of SahajMoney.com
Further, the insurer must mention policy-wise guaranteed surrender values (GSV), special surrender value (SSV) and payable surrender values separately in the benefit illustration. IRDAI has made it mandatory for the insurers to provide a customised benefit illustrations to prospective policyholders along with a prospectus while selling a policy. “Such benefit illustration shall be signed by both the prospective policyholder as well as the insurance agent or authorized person of intermediary or such other distribution channel/person or the employee of the insurer involved in sales process, as the case may be and shall form part of the policy document,” the regulator has mentioned.
IRDAI asked insurers to implement this special surrender value rule by September 30, 2024.
Life insurance new rule: How higher surrender value will benefit the policyholders
This move is in favour of the policyholders. Those who are stuck with a wrong product due to rampant mis-selling that has become quite prevalent in the insurance sector will get a higher amount back now. Vivek Jain, Head – of Investments, Policybazaar.com, says, “The provision for higher surrender value (SV), calculated at a prevailing 10-year government securities rate with a limited spread, significantly increases the value returned to policyholders in the event of a policy surrender, after the completion of the first year.”
Kumar adds, “IRDAI faced a lot of backlash from consumer advocates for giving into the demand of Insurance companies on Guaranteed Surrender Value (GSV) a few months back. With the new master circular IRDA has tried to compensate consumers by tying Special Surrender Value (SSV) calculation to a discount factor based on G-Sec. It’s a welcome step and would help end consumers in receiving higher surrender value,” says Kumar.
The regulator also said that the insurers can offer higher guaranteed surrender values (GSV) than those specified in the regulations. These values may vary with premium size, premium paying term, policy term, the duration elapsed at the time of surrender and other relevant factors, as applicable.
Will the new surrender value rule apply for existing endowment policies?
The special surrender value rule will apply for only new endowment policies, says Satishwar B., MD and CEO, Bandhan Life Insurance. The new surrender value norms introduced by IRDAI will apply primarily to new endowment policies issued after the implementation of the guidelines, says Rakesh Goyal, Director Probusinsurance.com.
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