Insurance regulator proposes increasing surrender value of non-linked policies: Explained

• Typically, a non-linked savings life insurance policy has two components in its premium, namely risk and savings component.
  
• The proposed changes if implemented would allow insurers to set a threshold premium amount beyond which the surrender charges won’t be applied.
  
• Experts say one should consider financial circumstances, goals, and alternatives before deciding to surrender an endowment policy.
  

The Insurance Regulatory and Development Authority of India (IRDAI) in its exposure draft released earlier this month (Dec 12) has proposed to amend the surrender value calculation for non-linked life insurance policies. Typically, a non-linked savings life insurance policy has two components in its premium, namely risk and savings component.

Currently, the guaranteed surrender value ratio as stipulated by IRDAI doesn’t differentiate between the savings and risk component of the premium. The exposure draft has possibly tried to strip out the savings component in each non-linked life insurance premium as the amount of premium in excess of the threshold premium.

“Logically, there should not be any surrender penalty in the savings component of the premium, which the proposed draft has tried to address. This would ensure the financial loss to the customer comes down significantly in case they surrender or discontinue their policy before the term completion,” says Sabyasachi Sarkar, appointed actuary, Go Digit Life Insurance.

This is an extremely customer-friendly step proposed by the regulator as a lot of policies lapse or are surrendered by the policyholders before the policy term ends. “This will ensure the debate around low surrender value among insurance products ends and makes non-linked traditional insurance plans attractive among customers,” adds Sarkar.

What it means

“The proposed changes if implemented would allow insurers to set a threshold premium amount beyond which the surrender charges won’t be applied and lead to more money in hands of policyholders if they chose to surrender the policy,” says Abhishek Kumar, SEBI Registered Investment Adviser and Founder, SahajMoney.com.

For example, If one is paying ₹1 lakh as annual premium and threshold value is set to 30% then in that case the surrender charges would apply only to ₹30,000 and balance ₹70,000 would be free from any surrender charges.

Earlier the surrender charges would apply to the entire annual premium of ₹1 lakh. So the customer stands to gain if these proposals are implemented.

Existing vs Proposed: Guaranteed surrender value of regular premium policy


Calculations and assumptions: The calculations are for non-linked traditional insurance policy with a policy term of 10 years and an annual premium of ₹1.5 lakh. Premium Threshold assumed at ₹25,000 and premium in excess of threshold limit at ₹1.25 lakh.

Note: The premium threshold limit assumed at ₹25,000 as no specific premium threshold is defined in exposure draft. The Exposure Draft states there shall be a Premium Threshold defined for each product.

Source: Go Digit Life Insurance estimates based on IRDAI Exposure Draft

However, surrendering your moneyback policy may not be a wise idea in all situations. You should consider your financial circumstances, goals, and alternatives before deciding to surrender the policy, as it may have significant financial implications.