The Insurance Regulatory and Development Authority of India (IRDAI) has released the final set of surrender charges for non-linked or linked life insurance products, including traditional endowment contracts. These charges will take effect on Monday, April 1, 2024. The move benefits life insurance companies in India. As per the most recent regulations issued by the regulator, surrender values will mainly remain unaltered when compared to existing surrender charges.
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“The IRDA (Insurance Products) Regulations, 2024, is largely maintaining the status quo as far as the surrender values of non-linked or linked life insurance products are concerned,” Emkay Global, a financial services company, said in its research report.
The following are the proposed slabs for surrender value percentages:
- If surrendered during the second year, the surrender fee will be 30 per cent of the entire premium paid.
- If relinquished during the third year, the total premiums paid would be reduced by 35 per cent.
- If surrendered between the fourth and seventh years, you will receive 50 per cent of the total premiums paid.
- If relinquished during the last two years, the total premiums paid will be reduced by 90 per cent.
For example, if a policyholder pays a premium of Rs 1 lakh for a policy and wants to surrender it after two years, she or he will receive just 30 per cent of the premiums paid up to that point. As a result, after paying two annual premiums totaling Rs 2 lakh, she or he will only be entitled to Rs 60,000.
Significantly, the effect on life insurers is projected to be limited. The finalised regulations avoid the high surrender values that were first suggested, which could have reduced policyholders’ Internal Rates of Return (IRR).
In December 2023, IRDAI issued a consultation document recommending that life insurance companies enhance the surrender value provided to their policyholders.
IRDAI chose to keep the restrictions after suggesting that the initial surrender value proposals in the draft regulations be increased. This was not well received by industry players, who expressed concerns about possibly increased short-term exits by policyholders. Apart from that, the regulator has approved the sale of Index Linked Insurance Products, in which the Net Asset Value (NAV) is linked to publicly available indexes.
Most life insurance companies had opposed the last draft proposal, citing asset-liability management difficulties. While the current position of surrender costs benefits insurance companies, policyholders will receive little relief.
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