Previously, surrendering a life insurance policy within the first year meant losing your entire premium. This could be a significant financial setback, especially if you were mis-sold the policy or faced unforeseen circumstances. However, things have changed with the introduction of the new Special Surrender Value (SSV) regulations by the Insurance Regulatory and Development Authority of India (IRDAI).
A surrender value in insurance is the amount paid by the insurers to a policyholder, if he or she terminates the policy before its maturity date. If the policyholder surrenders during the tenure of the policy, the earnings and savings portion will be paid to him or her.
Additionally, the norms stated that the discount rate for discounting the paid-up value to calculate SSV will be allowed up to 50 basis points (bps) higher than 10-year G-Sec yield.
Key Changes:
Calculation Formula: The SSV must be at least equal to the present value of the paid-up sum assured, future benefits, and accrued/vested benefits, minus any survival benefits already paid.
How it Works:
IRDAI specifies that the SSV calculation considers factors like the paid-up sum assured, future benefits, accrued bonuses, and survival benefits (if any), minus any already paid survival benefits. The interest rate used for this calculation cannot exceed the current yield on 10-year government securities (G-Secs) plus an additional 50 basis points.
Benefits for Policyholders:
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The revised rules offer greater flexibility to policyholders who may face financial difficulties. -
Policyholders who are forced to surrender their policies will experience a less severe financial loss. -
The new regulations aim to protect policyholders from unfair practices and provide them with more favorable terms.
Impact on Life Insurance Companies:
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Product Revisions: Life insurance companies had to revise their existing products to comply with the new regulations. -
Deadline Extension: While companies sought a three-month extension, IRDAI maintained the original deadline. -
Commission Adjustments: The new norms may impact commission structures for distributors. -
Internal Rate of Return (IRR): The IRR for customers may be affected due to changes in interest rates and surrender value calculations.
First Published: Oct 01 2024 | 2:02 PM IST
