Life insurance business is all set to enter a new phase from Tuesday, as the new norms on surrender value brought in by the Insurance Regulatory and Development Authority of India (IRDAI) will come into effect from October 1, 2024.

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.

Calculating surrender value

As per the master circular issued in June, the insurance regulator mandated that the special surrender value should be at least equal to the present value of paid-up sum assured on all contingencies covered and paid-up future benefits and accrued/vested benefits, duly allowing for survival benefits already paid. 

It has also prescribed a formula for calculating the surrender value. As per the existing regulation, insurers must pay 50 per cent of the total premium if a policy is surrendered between the fourth and seventh year.

“However, with the new special surrender norms, this could go up by over 20 per cent, to put it very simply,’‘ the Underwriting Head of a private insurer told businessline. 

The objective of IRDAI behind the new norms is to ensure ‘reasonableness and value for money’ for both exiting and continuing policyholders when determining surrender values.

Customer protection

According to experts, the new norms from Tuesday will result in a gain for those who wish to surrender the policies and will be a burden on the insurers. It is learnt that there was “some resistance’‘ to the new norms from the industry but the regulator had put his foot down in view of the need to ensure customer protection. The insurers’ response will be known going forward. It remains to be seen if this will be followed by hike in premiums and cost-cut measures like reduction in agents’ commission going froward.