Insurance regulator's final rules on surrender value from April 1: Here's what it means for policyholders

The Insurance Regulatory and Development Authority of India (IRDAI) has announced final regulations concerning surrender value. Effective April 1, 2024, surrender value is expected to remain the same or even lower if policies are surrendered up to a period of within three years.

However, policies surrendered between the fourth and seventh years may witness a marginal increase in surrender value.

For non-single premium life insurance policies, a guaranteed surrender value will be provided upon payment of premiums for at least two consecutive years.

30% of total premiums paid if surrendered during the second year.

35% of total premiums paid if surrendered during the third year.

50% of total premiums paid if surrendered between the fourth and seventh years.

90% of total premiums paid if surrendered during the last two years

The final regulations represent a revision from the draft regulations released in December 2023, which proposed an increase in surrender value.

In the context of these regulatory changes, surrender value in insurance pertains to the amount paid by the insurer to the policyholder upon termination of the policy before its maturity date.

Simply put, when someone purchases an insurance policy, they agree to pay premiums to the insurance company over a specified period. In return, the insurer promises to provide coverage for the insured event (such as death or illness) or to offer a payout at the end of the policy's term, known as the maturity date.

However, circumstances may arise where the policyholder no longer wishes to continue with the policy or needs access to the funds invested in the policy before its maturity date.

In such cases, the policyholder can choose to surrender the policy to the insurance company.

Upon surrender, the insurer calculates the surrender value, which represents the portion of premiums paid by the policyholder that has accrued value within the policy, considering factors like investment returns, fees, and administrative costs.

This surrender value is then paid out to the policyholder, although it might be subject to certain deductions or penalties, depending on the terms of the policy and applicable regulations.

The surrender value is intended to compensate the policyholder for the premiums they have paid into the policy, minus any applicable charges, and reflects the cash value of the policy at the time of surrender.

Tarun Chugh, CEO of Bajaj Allianz Life, expressed support for IRDAI's balanced approach, noting that the impact on life insurers is expected to be minimal under the finalised surrender value regulations.

While talking to CNBC-TV18, he said customers would have been the primary losers in the event of higher surrender values, leading to decreased Internal Rate of Returns (IRRs).

Chugh also mentioned the introduction of separate products with higher surrender values and anticipated little impact on VNB margin post-implementation.

This amount typically includes the earnings and savings portion accrued within the policy.

Chugh also addressed specific implications, stating that restrictions on changing premiums in savings and critical illness plans would have varying impacts, with the latter potentially becoming more challenging.