Surrendering Your Life Insurance

Surrendering Your Life Insurance? New Rule Changes Ensure a Bigger Payout!

Do you have a life insurance policy but are thinking about cancelling it or switching to a different one? If so, there’s some good news for you! Starting from October 1, 2024, life insurance policyholders will receive a higher refund if they decide to discontinue their policy during the early years after opening it.

The Insurance Regulatory and Development Authority of India (IRDAI) has recently launched a new rule that will allow insurance companies or providers to offer a better special surrender value (SSV) for traditional endowment insurance policies. Furthermore, this change aims to give life insurance customers more flexibility and access to their funds if they want to change policies. In simple terms, this means that if you decide to cancel your life insurance early, you will get back more money than before. This new rule will help you make decisions that suit your financial needs better.

What Does “Special Surrender Value” Mean?

In layman’s language, the Special Surrender Value (SSV) refers to the amount that a policyholder can receive if they decide to cancel or surrender their life insurance policy, according to the terms and conditions set by the insurer. The Insurance Regulatory and Development Authority of India (IRDAI) defines the surrender value as “an amount, if any that becomes payable in case of surrender following the terms and conditions of the policy.”

The introduction of the higher SSV is expected to provide greater flexibility and liquidity for life insurance policyholders who wish to switch policies. Thus, if you choose to discontinue your policy early, you will receive a better refund amount than previously available.

Recently, several insurance companies, including the Life Insurance Corporation of India (LIC), have approached the IRDAI to request a revision of the surrender value regulations and to extend the deadline for complying with the new norms. However, the regulator has not officially announced whether these requests will be accepted.

How is the Special Surrender Value Calculated?

The Insurance Regulatory and Development Authority of India (IRDAI) regulates the calculation of the Special Surrender Value (SSV) for a life insurance policy. According to a master circular for life insurance dated June 12, 2024, the SSV must be at least equal to the present value of the following components:

  • Paid-Up Sum Assured

This is the amount that is guaranteed to be paid upon the occurrence of an insured event, such as death or maturity, minus any unpaid premiums. The paid-up sum assured takes into account all contingencies covered under the policy.

  • Paid-Up Future Benefits

If applicable, this includes any future benefits that are due to the policyholder, such as income benefits or bonuses, which will be paid out based on the policy’s terms. These benefits are calculated on a present-value basis, reflecting their worth at the time of surrender.

  • Accrued/Vested Benefits

These are benefits that have accumulated or vested in the policyholder over time. The calculation must also consider any survival benefits that have already been paid out. This ensures that the policyholder receives a fair refund that accounts for all financial elements tied to the policy.

How the New Surrender Rules Benefit Policyholders Returning Their Policy after 1 year?

The landscape of life insurance is evolving, particularly with the new surrender rules that take effect from October 1, 2024. Under the old rules, if you cancelled your life insurance policy after one year, you would lose your entire premium. However, starting October 1, 2024, things are changing for the better! Now, if you decide to discontinue your policy after the first year, you’ll be eligible for a refund.

According to the new IRDAI guidelines, the Special Surrender Value (SSV) will be payable once you’ve completed one full year of premium payments. Thus, it ensures that you won’t lose everything if you need to exit your policy.

For policies with a limited payment term of less than five years or single premium policies, you can receive your SSV immediately after paying your first full premium. 

With these new provisions in place, policyholders can feel more secure in their choices and confident that they will be compensated fairly if they choose to leave their policy after the first year.

How Much Money Will You Get Back If You Surrender Your Insurance Policy?

When you surrender your life insurance policy, the amount you can get back has changed significantly with the new rules. Here’s how it works:

Old Rules

Under the old rules, if you decided to surrender your policy between the fourth and seventh years, you would only get back 50% of the total premiums you paid. For example, if you had paid a total of Rs 2 lakh in premiums and earned a bonus of Rs 40,000, you would receive Rs 1.2 lakh after four years (which includes 50% of the total premium plus the bonus).

New Rules

With the new special surrender value rules, you can expect to get back more money. For example, if you surrender your policy now, you could get back Rs 1.55 lakh instead of the earlier Rs 1.2 lakh.

Let’s look at a simple example of a policyholder named Mr. Ashok Pradhan. He works as a software engineer in New Delhi and bought a 10-year life insurance policy with a sum assured of Rs 5 lakh.

In the first year, Mr. Ashok pays a premium of Rs 50,000.

If he decided to leave the policy after just one year under the old rules, he would not get anything back and would lose the entire Rs 50,000 he paid.

However, thanks to the new rules, if Mr Pradhan decides to cancel his policy after one year, and if the insurer has received the full premium for that year, he will now receive Rs 31,295 back.

How Can the Policyholder Find Out Their Special Surrender Value?

Insurers are now required to provide customized benefit illustrations to potential policyholders when selling a policy. Remember that this illustration must be signed by both the policyholder and the insurance agent or representative, and it will become part of the policy documentation.

It’s important to carefully review the benefit illustration to understand the Guaranteed Surrender Values (GSV), Special Surrender Values (SSV), and other surrender values associated with your policy.

The Insurance Regulatory and Development Authority of India (IRDAI) has set a deadline for insurers to implement these new rules by September 30, 2024.

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