Major Changes to Surrender Value of LIC and Other Insurance Policies Under New Regulations
Millions of customers who prematurely surrender their LIC (Life Insurance Corporation of India) and other insurance company policies will receive welcome news. The IRDAI (Insurance Regulatory and Development Authority of India) has implemented significant changes to surrender value regulations, resulting in significantly higher payouts for policyholders compared to previous rules. These new regulations will come into effect on October 1, 2024, and will only apply to newly issued policies.
What is Surrender Value?
Surrender value is the amount an insurance company returns to a policyholder when they surrender their policy before maturity. This amount depends on several factors, including the number of years premiums have been paid, the type of policy, and the total sum assured. Under previous rules, surrendering a policy in the initial years often resulted in minimal or no returns.
What are the New Changes?
The IRDAI has mandated the implementation of a Special Surrender Value (SSV) for all endowment insurance policies. This means policyholders surrendering their policies will receive 20-30% more than previously. This decision aims to enhance customer protection and transparency within the insurance sector.
Previously, surrendering a policy within the first two years yielded no return. The new rules introduce partial payouts after just one year, significantly benefiting customers unable to maintain their policies long-term.
How Much Money Will Be Received?
Under the new rules, surrendering a policy after four years of premium payments could yield approximately ₹3.1 lakh, compared to approximately ₹2.4 lakh previously. Similarly, surrendering after only one year could now yield up to ₹62,000, whereas previously, nothing was received.
How Will Surrender Value Be Calculated?
The IRDAI has established a new formula for surrender value calculation. It will now be based on the interest rate of 10-year government bonds, with insurance companies allowed to add a maximum of 0.50% additional margin. This change makes the calculation process more transparent and market-based.
The new formula applies to regular premium policies, single premium policies, and policies with terms less than five years. This is particularly beneficial for those investing in short-term insurance plans.
Who Will Benefit?
These changes apply to all new insurance policies purchased after October 1, 2024. Existing policies will continue under the old rules. Therefore, those planning to purchase insurance may benefit from doing so after October 2024 to take advantage of the new regulations.
What is the Surrender Process?
To surrender a policy, first use the LIC website's surrender value calculator to determine the payout. Then, visit the nearest LIC branch and fill out Form 5074, providing necessary documents like KYC, policy bond, and bank details.
Alternative: Paid-Up Policy
Before surrendering, consider a paid-up policy. If you've consistently paid premiums for several years but can no longer afford them, converting to a paid-up policy keeps the policy active, with a reduced sum assured payable at maturity. This is often a better alternative than complete surrender.
Why Were These Changes Necessary?
Thousands of policyholders prematurely terminated their policies in recent years, receiving minimal returns and leading to customer dissatisfaction. The IRDAI believes that insurance products must be customer-friendly and transparent. These new rules aim to make surrender values clearer and more beneficial.
Furthermore, the new regulations provide upfront information to customers about potential payouts upon early surrender. This transparency will boost customer confidence in the insurance industry and foster long-term relationships.
Expert Opinion
Insurance experts consider this a significant improvement for customers. Previously, low surrender payouts made insurance seem unprofitable. The new rules are expected to change this perception, attracting more individuals to insurance products.
Financial advisors recommend consulting with an insurance agent or financial advisor before surrendering a policy and carefully considering all available options.
