New surrender value norms for life insurance
Surrender value is the amount paid by the insurance company to the policyholders if they stop paying further premiums due for any reason. IRDAI has recently issued new surrender value norms for traditional endowment policies. These norms are applicable starting from October 1, 2024. Let’s understand what these norms are and how they are going to impact the policyholders in the long run.
Key Takeaways
New surrender value norms are applicable starting from October 1, 2024.
These new surrender values are beneficial for the policyholders.
Surrender value is available for the policyholders after payment of a one-year premium or single premium.
The insurers must show surrender value illustration to the policyholders.
What are the new surrender value norms for life insurance issued by IRDAI?
As per new surrender value norms issued by IRDAI, life insurance companies have to offer higher surrender value to the policyholders even if they have paid a one-year premium. Earlier no surrender value was paid by the insurance companies when policies were returned after the first year. Now, policyholders are eligible for the surrender value even if they have paid a one-year premium or a single premium.
For better clarity let’s understand how the new surrender value will be paid to the policyholders under the new norms with a simple premium illustration.
A policyholder bought a 10-year policy paying a premium of Rs 60,000 for a sum assured of Rs 6 lakhs. As per existing norms he would not have given any value or refund if he stopped paying the premium. But as per the new surrender value norms guaranteed surrender value is paid to him even if he has paid a single premium.
Surrender value calculation as per new surrender value norms
Annual Premiums- Rs 60,000
Sum Assured- Rs 6,00,000
Bonus- Rs 1,20,000
Year
Premium
Total Premiums Paid
Bonus
Paid-up sum assured
Present value
% of Premium Paid
1
Rs 60,000
Rs 60,000
Rs 12,000
Rs 72,000
Rs 37,554
62.59%
2
Rs 60,000
Rs 1,20,000
Rs 12,000
Rs 1,44,000
Rs 80,736
67.28%
3
Rs 60,000
Rs 1,80,000
Rs 12,000
Rs 2,16,000
Rs 1,30,194
72.33%
4
Rs 60,000
Rs 2,40,000
Rs 12,000
Rs 2,88,000
Rs 1,86,624
77.76%
5
Rs 60,000
Rs 3,00,000
Rs 12,000
Rs 3,60,000
Rs 2,50,770
83.59%
6
Rs 60,000
Rs 3,60,000
Rs 12,000
Rs 4,32,000
Rs 3,23,496
89.86%
7
Rs 60,000
Rs 4,20,000
Rs 12,000
Rs 5,04,000
Rs 4,05,720
96.60%
8
Rs 60,000
Rs 4,80,000
Rs 12,000
Rs 5,76,000
Rs 4,98,432
103.84%
9
Rs 60,000
Rs 5,40,000
Rs 12,000
Rs 6,48,000
Rs 6,02,802
111.63%
10
Rs 60,000
Rs 6,00,000
Rs 12,000
Rs 7,20,000
Rs 7,20,000
120%
After year 1 the policyholder is eligible for a surrender value. IRDAI has also asked the insurers to provide the benefit illustration to the policyholder before selling them the life insurance policy. This benefit illustration has to be mentioned in the policy document.
What were the earlier surrender value norms for traditional endowment policies?
As per the earlier surrender value norms, the insurance companies had to pay the surrender values to the policyholders as per the below-mentioned structure.
No surrender value in case the policy is surrendered during the first year.
30% value of total premiums if the policy is surrendered during the second year.
35% value of total premiums if the policy is surrendered during the third year.
50% value of total premiums if the policy is surrendered during the fourth and seventh years.
90% value of total premiums if the policy is surrendered during the last two years
For better clarity let’s understand how the surrender value is paid to the policyholders under the old norms with a simple premium illustration.
A policyholder bought a 5-year policy paying a premium of Rs 60,000 for a sum assured of Rs 3 lakhs.
Surrender value calculation as per old surrender value norms
Annual Premiums- Rs 60,000
Sum Assured- Rs 3,00,000
Bonus- Rs 60,000
Year
Premium
Total Premiums Paid
Bonus
Paid-up sum assured
Present value
% of Premium Paid
1
Rs 60,000
Rs 60,000
Rs 6,000
Rs 66,000
–
–
2
Rs 60,000
Rs 1,20,000
Rs 6,000
Rs 1,32,000
Rs 36,000
30%
3
Rs 60,000
Rs 1,80,000
Rs 6,000
Rs 1,98,000
Rs 63,000
35%
4
Rs 60,000
Rs 2,40,000
Rs 6,000
Rs 2,64,000
Rs 2,16,000
90%
5
Rs 60,000
Rs 3,00,000
Rs 6,000
Rs 3,30,000
Rs 2,70,000
90%
How are new surrender value norms beneficial for the policyholders?
The new surrender value norms offer a range of benefits to the policyholders including:
High liquidity
The liquidity will increase with the introduction of new surrender value norms. The higher the liquidity, the more the interest of people in buying the endowment policies.
Flexibility
The flexibility for the policyholder increases with the introduction of new surrender value norms as the policyholder can get some money even if they return the policy during the first year.
Less deductions/penalties
There is a huge gap between the deductions by the insurer under new norms and old norms. Under the new norms, there are fewer deductions compared to old norms.
Less chances of misselling
There are fewer chances of misselling by the insurer and agents as they might have to undergo losses if the policyholder stops paying premiums in the early policy years.
Conclusion
The new surrender value norms will be applicable from October 1, 2024. These norms are highly beneficial for the policyholders as they offer high liquidity, flexibility, fewer deductions, and lower chances of misselling. When choosing a traditional endowment plan you should consider the surrender value illustration.
We at PolicyX.com offer transparency when selling policies. If you need expert guidance regarding your policy’s surrender value you can contact us at PolicyX.com. One of our insurance experts will guide you shortly.
