From October 1st, Life Insurance Refund Will Be Higher When You Surrender Your Policy

Starting October 1st 2024, if you are a life insurance policy holder and if you are thinking of exiting from your policy during the initial few years, you will get a higher refund as compared to people who exited before October 2024. This new update and with the introduction of the Special Surrender Value (SSV) regulations, a policyholder is expected to get much higher flexibility and liquidity in case they want to switch policies.

Before this, surrendering your life insurance policy within the first year meant losing your entire premium amount which meant significant financial loss for policyholders. However, with the introduction of the new Special Surrender Value (SSV) regulations by the Insurance Regulatory and Development Authority of India (IRDAI) things are looking positive. 

As per the revised norms of IRDAI, life insurance companies have to pay an updated special surrender value once the policyholder completes one year and has paid the full premium amount for that year. Till date, no life insurance company paid such a refund to the customers when the customers surrendered their life insurance policies,

Understanding What A Surrender Value In Life Insurance Is?

As a policyholder, if you decide to terminate your life insurance policy before the maturity date of the policy, then the life insurance company pays you an amount called “surrender value.”

Earlier, the surrender value used to be paid only as per the policy type and number of years you had the policy for. If the policy was active for a particular time period say 3 to 5 years or if the policy has a surrender value benefit. Keeping this in mind, the surrender value used to be calculated depending on the total premium paid, policy duration, and several other factors at the time of surrendering the policy like surrender charge, penalties if any. However, now if the policyholder surrenders the policy during the tenure date, the earnings and savings portion will be paid to them unlike before. Additionally, with the SSV regulations in place, the discount rate for paid up value to calculate SSV will be allowed up to 50 basic points (bps) higher than 10-year G-sec yield.

Read more over here to understand in detail about Surrender Value in Life Insurance.

Key Changes in Regulations

Listed below are the key changes in the regulations effective from the 1st of October:

Enhanced Special Surrender Value (SSV): Compared to previous rules (before 1st of October 2024), policyholders who choose to surrender their policies right after the first policy year will now be receiving a higher SSV.

Updated Calculation: In order to get the benefits, the SSV must be equal to the present value of the paid up sum assured, future benefits, and vested or accrued benefits minus any kind of survival benefits paid for already.

Discount Rate Adjustment: There has been an increase in the discount rate used to calculate the SSV. This rate has been increased by up to 50 basis points resulting in higher surrender value payouts.

Let’s understand the above with an example: suppose Rekha has purchased a non-par endowment policy at an annual premium of INR 1.2 Lakh and the policy is for a period of 5 years (5 premium paying terms) for a tenure of 10 years. Now if Rekha has paid the premium of INR 1. Lakh in the first year and now wants to surrender their policy, they will receive INR 1.06 Lakh. Earlier, Rekha would have received INR 0 before this regulation.

How Does SSV Work?

As per IRDAI, SSV calculation is considering the following factors - paid up sum assured, future benefits, accrued or vested bonuses, and survival benefits if any minus any kind of survival benefits which are already paid for.

It is important to note that the interest rate for this calculation cannot at any given time exceed the current yield on 10 year Government securities or G-secs plus an additional basis points of 50.

What These Changes Mean For The Policyholder?

For the policyholders, the enhanced SSV regulation has brought in several benefits as listed below:

• Greater Financial Flexibility: With the revised rules, the policyholder now has greater flexibility on controlling their finances and can take out the money in case they require financial assistance/ help.

• Less Severity of Losses: In case the policyholder is forced to surrender their life insurance policy due to any reason, they will face less severe financial losses as compared to earlier when they lost everything while surrendering the policy.

• Protection of Policyholders: This new regulation aims to protect the policyholders from any sort of unfair practices and give them a favourable outcome in case they choose to surrender their policies.
• Trust in Insurance Companies: With this new regulation, there will be a sense of public trust that will be built on the insurance companies, thereby making the policyholder less apprehensive with their investments.

What These Changes Mean For The Insurer?

Here’s what the SSV regulation update means for the life insurance companies:

• Revision in The Products: In order to comply with the new regulations, life insurance companies had to revise their existing life insurance policies/ products.

• Extension of Deadline: Life insurance companies sought a three month extension from IRDAI for bringing this new regulation to work but IRDAI maintained its original plan of bringing the enhanced SSV regulation from the 1st of October 2024.

• Adjustment of Commission: With the introduction of this new regulation, there may be certain impact on the commission structures of the insurance distributors and aggregators.
• Internal Rate of Return (IRR): Due to the changes in the interest rates and surrender value calculations, the IRRs for customers may be affected.