Irda eases surrender rules, but no big benefits for policyholders

Insurance regulator IRDA has changed the rules related to surrender value of life insurance policy. Closure of the insurance policy before maturity is considered as surrender. If you surrender the policy, you get a part of the premium which has been paid, which is called surrender value. New rules related to surrender value have come into effect from April 1.

So, what are the new rules regarding surrender value? What will be the effect of change in rules? What things should be kept in mind while surrendering an insurance policy? Let us understand.

When the insured surrenders a policy, he does not get most of the premium paid. IRDA had recently proposed to increase the surrender value of traditional policies to protect insurance customers from huge losses. Now first of all let us understand what were the rules for surrender value before the new rules set in.

Until now life insurance companies were giving two options to surrender the policy. First – Guaranteed Surrender Value in which you could surrender the policy only after completion of 3 years. No money was returned if the policy was surrendered before three years. In the second option, the policyholder got a special surrender value. This value was decided on the basis of the basic sum assured, total bonus and surrender value. If the premium was paid for three years, then up to 30 percent of the total deposit amount was returned. On surrendering the policy between four to seven years, up to 50% of the amount was returned.

Each insurance companies had different rules for surrender value. IRDA has now fixed the rules related to surrender value. Now you will get guaranteed returns on surrendering the policy. But this will not benefit the insured much. In the new system, if the policy is older then the surrender value will be higher than before.

Under the new rules, if the policy is surrendered in the second year, 30 percent of the total premium will be refunded. But the benefit of surrender value will be available only when you have deposited the first two premiums. If the policy is surrendered in the third year, the insurance company will return 35 percent of the amount.

If the insurance policy is surrendered between the fourth and seventh year, then 50 percent of the total premium paid will be returned to the insured. If the policy is surrendered before two years of maturity, you will get 90 percent of the premium back.

If the policy is of single premium then it can be surrendered after two years. Under the new rules, 75 percent of the total premium deposited will be refunded in the third year. If the policy is surrendered in the last two years of the term, you will get 90 percent surrender value.

Now the question is, what effect will this change have?

SEBI Registered Investment Advisor Jitendra Solanki says that a provision for guaranteed surrender value has been made in the new guidelines. But this will not benefit the insured much. The new rules are more or less the same as before. In its first proposal, the insurance regulator had made a provision to remove surrender charge after a period. But due to lobbying by the insurance industry, this proposal was withdrawn. If the old proposal had been implemented, the entire premium would have been received as surrender value after the stipulated period. Now, if the policy is surrendered just one year before maturity, only 90 percent of the amount will be refunded. Overall, insurance companies will benefit from the new rules of IRDA.

Cases of misselling of insurance  The government has also expressed concern on this issue. There have also been cases when life insurance was sold to people above 80 years of age. All this is being done in the greed of huge commission.

If IRDAI had reduced the surrender charges, insurance companies would have had to cut agent commission. Obviously this would have had a negative impact on insurance sales. The major advantage of increasing the surrender value would have been that misselling of insurance could have been curbed. IRDAI taking a step back on this issue will increase misselling of insurance, the consequences of which will have to be borne by the insured.

In such a situation, buy any life insurance policy only after thinking carefully. Do not buy any policy under anyone’s pressure. If you close the insurance policy before maturity, you will be in loss. In this situation, only a small part of the premium paid will be refunded. Before surrendering the policy, understand the rules related to it thoroughly.