Topic 2: SURRENDER VALUE IN LIFE

Following the introduction of cashless insurance premiums, the Insurance Regulatory and Development Authority of India (IRDAI) announced a new provision on June 12th. This provision aims to provide a fairer deal for life insurance policyholders who are unable or unwilling to continue paying their premiums. This new rule, based on a consultation paper released in December, guarantees a better "surrender value" for policyholders who choose to exit their plans. Previously, policyholders who stopped paying premiums might receive minimal or no payout. The IRDAI has mandated that insurers, when calculating surrender value, must ensure "reasonableness and value for money" for both policyholders who continue their plans and those who choose to exit. In simpler terms, this means policyholders who need to discontinue their life insurance plans will receive a more significant payout under the new provision. This change offers greater flexibility and financial security for policyholders. Some key takeaways from this provision can be listed down to understand its benefits to the life policyholders:

  • IRDAI has mandated that life insurers must now offer a special surrender value (SSV) after the first policy year, provided one full year's premium has been received.
    • For policies with limited premium payment terms of less than 5 years and single premium policies, the SSV becomes payable immediately.
  • The SSV must at least equal to the expected present value of the paid-up sum assured, paid-up future benefits, and accrued benefits. Insurers can now offer higher Guaranteed Surrender Values (GSV) than the minimum specified, based on factors like premium size, term, and policy duration.
  • The surrender value percentages are structured as: 30% of total premiums paid if surrendered in the second year, 35% in the third year, and 50% between the fourth and seventh years. It remains at 90% in the last two years.
The new IRDAI provision is designed to benefit both policyholders and the insurance industry. It offers policyholders more control over their plans by providing greater liquidity and flexibility. They can exit their policies with a fairer "surrender value" if needed, which can be especially helpful in the initial years. This improved transparency also tackles mis-selling practices, ensuring policyholders get plans that truly meet their needs. While there may be some impact on insurers due to the enhanced surrender value, this is minimized by the fact that most policies remain active for the long haul. The regulations also target commission structures for agents and intermediaries. Reducing excessive commissions can lead to cost efficiencies for insurers, potentially translating into more competitive premiums for customers in the future. Overall, these changes promote transparency and accountability in the insurance sector, creating a win-win situation for both policyholders and insurers.

Despite moderate growth in life insurance during 2023-24, the future looks bright. Industry projections suggest annual growth exceeding 6% between 2024-28. This optimism stems from rising incomes, growing public awareness of insurance benefits, and supportive government initiatives. However, a significant challenge remains – a vast "protection gap" where 93% of potential risks are uninsured. The new IRDAI regulations address this gap and lay the groundwork for a stronger Indian insurance sector. These provisions target the commission structures of agents and intermediaries, aiming to create a more transparent, efficient, and customer-centric distribution system. By promoting fair, reasonable, and ethical practices, the regulations empower agents to act in the best interests of policyholders. Additionally, this focus on efficiency is expected to drive down costs and premiums, ultimately benefiting consumers. In essence, these changes pave the way for a more inclusive and robust insurance market in India.



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