Going by IRDAI’s latest master circular on life insurance, policyholders exiting endowment or guaranteed return life insurance policies can do so at highly improved rates compared to earlier. After improving PED waiting periods, moratorium period and accessibility for seniors in health insurance, IRDAI has turned its gaze on life insurance and addresses the most pressing needs for policyholders.

A loss on surrender

The earlier regime fully incorporated the ‘surrender’ in surrender values. Life insurance products like endowment and guaranteed returns are long-term commitments. In lieu of annual premium payments extending to 10-15 years, policyholders can expect a particular yield and death cover in life insurance plans. But owing to an emergency or a change in plans, if one were to exit the plans mid-way, the surrender value to be expected was a mere fraction of the payments made. In the earlier regime, surrender values were as low as 20-30 per cent of payments made. For instance, if one exited at year 2 after making two payments of ₹1 lakh in a 10-year plan, one could expect a return of ₹40,000 – 50,000 on surrendering.

A recent draft notification in March 2024 also suggested surrender values of 35 per cent in year one to 50 per cent from fourth year onwards, which was not implemented then. But in the master circular released in June 2024, IRDAI has stipulated much more beneficial rates on surrendering policies.

New regulation

Policyholders can now expect 60-80 per cent recovery of premiums paid in the first year itself. Adjusted for the death cover that must be accounted for, this makes surrender values almost break even for policyholders, without a financial penalty imposed as was the case earlier.

The IRDAI master circular states that the surrender values should be at least equal to the expected present value of the paid-up sum assured or paid-up future benefits. The discounting rate to bring it to present value also has been specified - not more than the prevailing yield on 10-Year G-Sec plus a spread not exceeding 50 basis points. This is explained with an illustration here.

Assume a life insurance policy was purchased with ₹1 lakh annual premium and premium paying term of 10 years. At the end of term, the policyholder was guaranteed a return of 6.25 per cent yield and a life cover of ₹10 lakhs. This implies that on completion, the policyholder will receive ₹14.17 lakhs as survival benefit or ₹10 lakhs on death during the policy period.

The surrender value equivalent to paid-up sum assured is calculated as original sum assured (₹14.17 lakh) multiplied by 2/10 - ratio of premiums paid to total premium paying term (also as per IRDAI circular). The survival benefit accounts for underwriting the life cover and hence is not expected to be adjusted again for surrender values.

This implies that 2/10th of the Rs 14.17 lakh to be paid in 10th year is paid in the current year by discounting it at 6.97 per cent + 50 bps for the remaining eight years. This comes to ₹1.60 lakhs or 80 per cent of the paid value (₹2 lakhs), compared to 30-40 per cent offered in earlier insurance policies.

Benefit policyholders

Vivek Jain - Head of Investments at Policybazaar.com, says that surrender value changes are a welcome move by IRDAI. It benefits policy holders who are unable to continue with the policy for various reasons. Life Insurance offers good returns and protection. The returns are tax-free if the annual premiums are less than ₹5 lakh. The changes to surrender values further improve the attractiveness of the instrument by allowing a degree of flexibility in committing to the policy.

The policy is expected to be in force from September-2024 and any policy sold after that date should carry a customer information sheet detailing surrender values as such. The policies already in place unfortunately may not allow any improvement in surrender values. IRDAI may also clarify the final surrender values guidelines with an illustration allowing insurance companies to follow.

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