A new legislation by the Insurance Regulatory and Development Authority of India (Irdai) will start to take effect on October 1, 2024, and would result in a greater payout for policyholders who terminate their life insurance plans in their early years.
The purpose of the revised policy is to provide consumers who want to transfer life insurance more freedom and liquidity.
New Legislation by IRDAI To Take Into Effect on October 1
There has been no formal confirmation of the requests made by insurers, including the Life Insurance Corporation of India (LIC), to Irdai to amend the surrender value requirements and extend the deadline for compliance.
Insurance firms must abide by the new special surrender value laws as of October 1, 2024, if the compliance deadline is not extended.
The present value of the paid-up sum assured, paid-up future benefits, and accrued benefits—accounting for any survival benefits already paid—will be used to compute the special surrender value, or SSV.
The calculation for paid-up value is as follows: (total number of premiums payable / (number of premiums paid × sum assured).
In order to determine the expected present value of the paid-up sum assured and future rewards, Irdai has set a maximum spread of 50 basis points (bps) above the 10-year G-Sec rate. Every year, the appropriate special surrender value will be assessed in light of the 10-year G-Sec’s current yield.
50% Of Total Premiums To Be Reimbursed
Before, 50% of the total premiums would be reimbursed if an insurance was cancelled between the fourth and seventh year.
When a policy ends after four years, the policyholder may earn Rs 1.55 lakh under the new SSV requirement as opposed to Rs 1.2 lakh under the previous regulations.
Instead of losing their whole payment, policyholders can now get a refund even if they cancel their coverage after just one year.
According to the new legislation, the SSV becomes payable after finishing the first policy year, provided the full premium has been received.
The SSV is due as soon as the first complete premium is paid for single premium policies and policies with limited premium payment terms shorter than five years.
The potential compensation for policyholders who surrender their plans after the first year has been greatly increased under the new laws.
For instance, if a policyholder with a 10-year policy and an amount insured of Rs 5 lakh pays a premium of Rs 50,000 in the first year and leaves the policy after a year, they will receive Rs 31,295 instead of losing the entire premium as per the prior regulations.
In benefit representations given to potential policyholders, insurers are required by Irdai to explicitly state guaranteed surrender values (GSV), special surrender values (SSV), and payable surrender values.
During the sales process, insurers are required to furnish prospective policyholders with personalized benefit illustrations, which need to be endorsed by both parties and incorporated into the policy records.
The new special surrender value rules are aimed to benefit policyholders, particularly those who may have been mis-sold plans that do not meet their needs.
Following the implementation of these laws, new endowment policies are primarily subject to the new surrender value guidelines.
