The Insurance Regulatory and Development Authority of India (IRDAI) is contemplating a significant reduction in surrender charges for life insurance policies.
Policyholders may soon find relief as they stand to retain a more substantial portion of their premium in the event of policy cancellation before its original maturity date.
Understanding Surrender Charges: An Insight into Insurance Terminology
Surrender charges, often viewed as penalties for prematurely terminating life insurance policies, are in the spotlight as IRDAI proposes new regulations across all insurance product categories.
The move aims to empower policyholders by minimizing financial losses associated with surrendering policies.
Traditional Endowment Policies Set to Benefit the Most
While the impact of the proposed regulations spans various insurance categories, it is anticipated to be most pronounced in the traditional endowment segment.
These policies, offering a lump sum payout on maturity and profit-paying plans, may witness substantial changes that favor policyholders.
Proposed Changes in Surrender Rules: What to Expect
Under the new rules, policyholders facing financial challenges or those unable to pay insurance premiums can benefit from lower surrender charges.
The proposed regulations suggest fixing a premium limit for each insurance product, beyond which no surrender charges will be applicable, regardless of the cancellation timing.
While the premium limits are yet to be determined, the move is poised to offer policyholders a more favorable surrender experience.
Enhanced Policyholder Flexibility: The Potential Impact
If the IRDAI’s proposal is approved, policyholders will enjoy increased flexibility in canceling policies without incurring exorbitant surrender charges.
This change is particularly beneficial for individuals who may have taken policies hastily, under fraudulent circumstances, or those facing financial constraints preventing annual premium payments.
Encouraging Long-Term Commitment: A Customer-Centric Approach
Sabyasachi Sarkar, Appointed Actuary at Go Digit Life Insurance, emphasizes that the existing surrender charges often discourage individuals from opting for long-term non-linked plans.
The proposed changes align with customer interests, aiming to address lapses and surrenders that commonly occur in the fifth year of traditional insurance policies.
Boosting Policyholder Returns: Implications for Traditional Insurance Policies
Considering persistency ratios, a measure of policy continuation, the proposed surrender rules can potentially benefit policyholders.
For instance, Life Insurance Corporation of India (LIC) currently exhibits a persistency ratio of 42.45 percent based on the number of policies and 55.17 percent based on premiums.
Lowering surrender charges could lead to increased returns for policyholders, especially those with traditional insurance policies.
