The Insurance Regulatory and Development Authority of India (IRDAI) has announced the final set of surrender charges in non-linked or linked life insurance products — traditional endowment policies. These charges are going to be effective from April 1, 2024. The move is in favour of the life insurance companies in India.
What are the new insurance surrender charges?
According to the latest regulations set by the regulator, the surrender values will largely remain unchanged when compared to the existing surrender charges. “The IRDA (Insurance Products) Regulations, 2024, is largely maintaining the status quo as far as the surrender values of non-linked or linked life insurance products are concerned,” said Emkay Global in its research report.
Here are the proposed slabs for the surrender value percentages:
1) 30% of total premiums paid if surrendered during the second year.
2) 35% of total premiums paid if surrendered during the third year.
3) 50% of total premiums paid if surrendered between the fourth and seventh years.
4) 90% of total premiums paid if surrendered during the last two years.
For instance, if a policyholder who pays a premium of Rs 1 lakh for a policy wants to surrender it after two years, she will get only 30% of the premiums paid till that time. So, she will be entitled to get only Rs 60,000 back after paying two annual premiums amounting to Rs 2 lakh.
Reduction of surrender charges that didn’t materialise: What IRDAI proposed in December
The final surrender charges are contrary to the surrender value with a “threshold limit” that was proposed by the regulator earlier in December. It was aimed at reducing the surrender charges on traditional plans so that policyholders get more money back if they prematurely exit the policy.
What was the earlier proposal? According to the IRDAI draft regulation, “There shall be a premium threshold defined for each product, wherein, there shall not be any surrender charges imposed on the balance of the premiums beyond such limits, irrespective of the timing of the surrender.” It means that there will be a threshold limit up to which the surrender charges will be applied. Any amount over and above the threshold limit will be refunded to the policyholder.
Following the above-mentioned example, if the policyholder wanted to return the policy after paying premiums for two years, here is how the surrender charges would have been calculated, as per the proposal:
Assuming the threshold value for a policy with an annual premium of Rs 1 lakh is Rs 25,000, as per Emkay Global research report.
When she returns the policy after two years, she will get the ‘adjusted guaranteed surrender value’. It will be calculated in the following way
1) Surrender value of the threshold limit (Rs 25,000*2*30%) = Rs 15,000
2) Premiums paid beyond the threshold limit = (Rs 75,000*2*100%) = Rs 1.5 lakh
So the ‘adjusted guaranteed surrender value’ will be Rs 1,65,000.
As you can see, if the proposal was passed, the policyholder could get Rs 1,65,000 back after two years, instead of Rs 60,000, according to the existing surrender charges. In this case, the surrender value could go up to 175%.
Higher surrender value norms: Relief for insurers, setback for policyholders
Most life insurance companies had taken a stand against the earlier draft proposal, citing asset-liability management issues.
While the status quo in surrender charges is good news for insurance companies, the customers will hardly get any major relief. “(This move) is a big departure from the exposure draft of Dec-23. This status quo provides a big relief to the life insurers, who otherwise had the tough task of balancing the impact of increased surrender value to the lapsing customers by tinkering with the distributor’s payout, providing benefit to the persistent policyholders, and maintaining shareholders’ profitability (VNB margins),” said Emkay Global.
Those who are stuck with a insurance policy, could be benefitted by the earlier proposed rules.
“IRDAI in its latest Gazette Notification has maintained the status quo after building hope for policyholders by floating a consultation paper on increasing the surrender value for life insurance policies in December 2023. So customers will continue to receive paltry surrender value in initial years if they decide to surrender the policy. This step while is in favour of insurance company but is not in favour of policyholders as many to avoid sunk cost would continue in these non-term life insurance policy which offers very low cover at high premium and low returns due to its investment component,” said Abhishek Kumar, a SEBI registered investment advisor (RIA) and Founder of SahajMoney.
Monika Halan, a veteran personal finance writer and Chairperson of SEBI Investor Protection and Education Fund (IPEF) took to twitter to talk about how this move is not at the best interest of the policyholders. She wrote, “It is shocking that the insurance regulator has discarded a fairer value proposal to policyholders for early surrender. Now with first year commissions that can go up to 100% and very high surrender costs, expect to be mis-sold more and more. What is the @FinMinIndia doing?”
— monikahalan (@monikahalan)
“Compared to the draft regulations which proposed higher surrender values, the actual regulations which will come in force from April 1, 2024, envisages a lower surrender value for policyholders. Knowing the misselling that happens in insurance products, the regulator should have been bold enough and not come under industry pressure. This was an opportunity to provide policyholders with a decent exit from locked-in policies that were mis-sold to them,” said Ravi Saraogi, Co-founder of Samasthiti Advisors and a SEBI RIA.
“We believe that greater flexibility for policyholders is a good idea, and having high surrender charges creates a barrier to this flexibility. It would therefore have been preferred to have surrender charges made lower, so that policyholders have a greater choice in terms of how they wish to deal with their insurance policies, in case of changes in their financial situation,” says Vishal Dhawan, a Certified Financial Planner and Founder of Plan Ahead Wealth Advisors.