IRDAI Proposes Higher Surrender Value, Lower Charges on Life Insurance

IRDAI Proposes Higher Surrender Value, Lower Charges on Life Insurance

The Insurance Regulatory and Development Authority of India (IRDAI) has issued a pivotal consultation paper addressing the enhancement of surrender values for life insurance policies. In insurance terms, ‘surrender’ denotes the voluntary termination of a life insurance policy by the policyholder before its maturity or the occurrence of the insured event. Upon surrender, the policyholder is relieved from premium payments, and the insurance coverage is terminated. However, the insurance company is obligated to provide a specified surrender value to the policyholder who has paid premiums during the interim period.

Reports indicate that IRDAI has been diligently examining instances where policyholders, despite paying premiums for several years, received minimal surrender values. It has also been observed that some life insurance products were designed in a manner that led to surrenders, allowing insurers to retain a substantial portion of the premiums as surrender charges.

The consultation paper proposed by IRDAI aims to ensure that policyholders receive a considerably higher surrender value and that surrender charges imposed by insurers are reduced. While this is advantageous for policyholders, as they receive a more significant portion of the premium in case of surrender, it poses a challenge for life insurers, impacting their profit margins. The non-participating portfolio is anticipated to be most affected, given that surrenders predominantly occur in this segment.

To better comprehend IRDAI’s proposal, consider a non-participating policy with an annual premium of ₹1 lakh surrendered in its fourth year. Under the current system, the surrender value is calculated on the premiums paid for the second and third years, resulting in a surrender value of ₹70,000 for the policyholder. In contrast, the insurer deducts ₹2.3 lakh as surrender charges. IRDAI’s proposed change involves a shift in the surrender value calculation, introducing a Guaranteed Surrender Value and recommending the refund of premiums beyond a specified threshold.

In the proposed scenario, assuming a threshold of ₹25,000 over three years, the surrender value is calculated as 35% of the threshold value, amounting to ₹26,250. Additionally, the refund beyond the threshold is calculated as the total premium paid minus the threshold, resulting in a refund of ₹2.25 lakh. The total surrender value under the proposed regime would then be ₹2,50,250, a significant increase compared to the ₹70,000 surrender value under the current system. Moreover, the surrender charges for the insurer reduce to ₹49,750.

BC Patnaik, a Member (Life) at IRDAI, emphasized that life insurance companies can express their opinions on the consultation paper. He assured that the paper incorporates substantial actuarial input and affirmed that the concerns of life insurers would be addressed.