What Irdai's latest draft says about surrender charges

Key changes will benefit policyholders, while business margins of insurers will take a hit

- Aprajita Sharma

Surrendering of insurance policies will likely no longer be a financial burden for policyholders. Insurance regulator Irdai has proposed to increase the surrender value for policies among key changes in the product design of life, health and general insurance.

Among the raft of proposals put forth by the regulator on 12 December, the most significant one relates to surrender value in non-participating life insurance plans. Non-participating plans are those in which survival/maturity benefits are guaranteed and are not linked to the profits that insurers earn. If the proposal on surrender charges comes into effect, it will be a huge positive for policyholders looking to close the policy during the premium payment term. However, it will hit the business margins of insurers whose surrender income will reduce.

The new proposal

“The proposed draft will give policyholders more flexibility to choose appropriate saving-linked products in accordance with the changes in their financial plans as new rules will reduce the risk of substantial financial loss in case of early discontinuance. Although, it will compel insurers to reduce the underwriting and other costs," says Sabyasachi Sarkar, appointed actuary, Go Digit Life Insurance.

The regulator has proposed a new framework to calculate surrender charges which is expected to increase the surrender value to 75-84% of the premium from the existing 0-50%. Essentially, a premium threshold will be fixed on which surrender charges will be levied. The balance premiums above this threshold will be returned to policyholders when they surrender the policy.