From October 1, 2024, new rules from the Insurance Regulatory and Development Authority of India (IRDAI) have come into effect, changing how life insurance policyholders can surrender their policies. The changes are designed to provide more benefits to policyholders, including a higher refund even if the policy is surrendered within the first year. Let’s take a closer look at what these new rules mean for policyholders.
Guaranteed Refund from First Year
Under the new guidelines, policyholders will now receive a guaranteed surrender value from the first year of paying their premiums. Previously, policyholders had to wait until the second year or later to receive any surrender value. This is a significant shift, as now even those who have paid only one annual premium can get a refund if they decide to exit the policy.
This change offers relief to policyholders who may need to surrender their life insurance policy early. In the past, they would have lost the entire premium amount if they surrendered the policy within the first year. The new rule ensures that policyholders can receive a partial refund of their premium, even within the first 12 months.
Earlier Rule: No Refund in the First Year
Before this new rule, if you purchased a life insurance policy and decided to surrender it within the first year, there was no guaranteed surrender value (GSV). This means policyholders would get no refund, and the money invested was essentially lost. The GSV was only available after the second year, but now IRDAI has removed that restriction, making the surrender process more flexible and beneficial to the policyholder.
What Does Surrendering a Policy Mean?
Surrendering a life insurance policy means that the policyholder has chosen to exit the policy before its maturity date. When this happens, the insurer refunds the policyholder with a surrender value, which is a combination of the guaranteed surrender value (GSV) and sometimes a special surrender value (SSV).
The GSV is a set amount or percentage of the premiums that the policyholder is entitled to receive back, even if they exit the policy early. The SSV, on the other hand, may be higher but depends on several factors such as the policy’s tenure and bonuses earned. The total refund a policyholder gets is the higher of the two values, either GSV or SSV.
Example of Refund Under New Rule
Let’s say a policyholder has a life insurance policy with a maturity period of 10 years and a sum assured of Rs 5 lakh. Under the new rule, if the policyholder surrenders their policy after paying just one year’s premium, they are entitled to a refund.
For instance, if the policyholder pays an annual premium of Rs 50,000 for the first year and then decides to surrender the policy, they will get a refund of Rs 31,295 under the new IRDAI guidelines. This amount is based on a calculation that considers the present value of the sum assured and any bonuses earned during the policy term.
Impact on Long-Term Policyholders
While these changes offer more flexibility to those who may need to exit their policies early, long-term policyholders might see some impact on their returns. Since life insurance companies will now have to increase their surrender payouts in the first year, this could raise costs for the insurers.
As a result, some reports suggest that long-term returns on life insurance policies may be slightly lower, especially for non-PAR (non-participating) policies. Policyholders may see a reduction of around 0.3% to 0.5% in returns due to the higher surrender values. Additionally, PAR (participating) policies, which offer bonuses, might also see smaller bonus payouts as companies adjust to these new costs.
A Positive Change for Policyholders
Despite the potential impact on long-term returns, the new rules represent a positive change for many life insurance policyholders. Those who may face financial difficulties or unexpected life changes no longer have to wait for two years to get some of their investment back. The guaranteed refund from the first year offers peace of mind and financial security for those who may need to surrender their policy earlier than expected.
Summary of Key Points
- New Refund Rules: Policyholders can now get a refund if they surrender their life insurance policy after just one year, thanks to new IRDAI rules.
- Guaranteed Surrender Value: The policyholder is entitled to a guaranteed surrender value from the first year, which wasn’t the case under previous regulations.
- Impact on Long-Term Returns: Long-term investors may see slightly lower returns due to the increase in first-year surrender values.
- Policy Example: A policy with an annual premium of Rs 50,000 would return Rs 31,295 if surrendered after one year, based on current calculations.
