Starting next month, a policyholder will get a higher refund if he exits his life insurance policy during the initial years. The Insurance Regulatory and Development Authority of India (Irdai) has asked the insurance companies to offer a higher special surrender value (SSV) for traditional endowment policies from October 1, 2024. This is expected to provide greater flexibility and liquidity for life insurance customers who want to switch policies.

There have been several reports that the insurers, including the Life Insurance Corporation of India (LIC), urged Irdai to revise the surrender value regulations and extend the deadline to comply with the norms. However, there is no official communication or notice from Irdai stating that the regulator has accepted their request. In absence of any extension, the insurance companies will have to comply with the special surrender value regulations that will come into effect from October 1, 2024.

So as a life insurance policyholder, you must know what the new surrender value rule is and how it will be calculated. If you terminate your life insurance policy after one year, how much money will you get back? ET Wealth Online decodes the new special surrender value rule proposed by Irdai to answer all your queries.

Life insurance new rule: How is the special surrender value calculated?

In a master circular for life insurance business dated June 12, 2024, the Irdai has said that the special surrender value should be at least equal to the present value of
(a) paid-up sum assured on all contingencies covered and
(b) paid-up future benefits (such as income benefits), if any, and
(c) accrued/vested benefits, duly allowing for survival benefits already paid (whatsoever name called), if any

Paid-up value is calculated as per a formula: number of premiums paid X sum assured/total number of premiums payable. To arrive at the expected present value of the paid-up sum assured and paid-up future benefits, Irdai has specified a maximum spread of 50 basis points (bps) over 10-year G-Sec.
The applicable special surrender value shall be reviewed annually based on the prevailing yield on 10-year G-Sec, the regulator said.

How much money will you get back if you surrender your insurance policy?

Abhishek Kumar, a SEBI-registered investment adviser and Founder of SahajMoney.com said, "According to the earlier rules, 50% of total premiums must be paid if a policy surrendered between the fourth and seventh years. You would have got Rs 1.2 lakh back (50% of the total premium of Rs 2 lakh and a bonus of Rs 40,000) if you had left the policy after four years, according to previous surrender value norms. With this special surrender value norm now, you will get back Rs 1.55 lakh."

If you exit life insurance after one year, you will get higher surrender value

Till now, if a policyholder exits a life insurance policy after one year, he would have lost his entire premium. With the new special surrender value norm, policyholders will be eligible to get a refund even if they leave after the first year. According to the regulator, "SSV calculated as above shall become payable after completion of first policy year provided one full year premium has been received." IRDAI added, "Provided for policies with limited premium payment term of less than five years and single premium policies, SSV shall become payable immediately after receipt of first full year premium or single premium, as applicable."

Vivek Jain, Head - of Investments, Policybazaar.com, said, "The provision for higher surrender value (SV), calculated at a prevailing 10-year government securities rate with a limited spread, significantly increases the value returned to policyholders in the event of a policy surrender, after the completion of the first year."

Let's consider another example. A policyholder bought a 10-year policy with a sum assured of Rs 5 lakh. He pays a hefty premium of Rs 50,000 in the first year. Now if he leaves the policy after one year, he would not have gotten any refund from the insurer. He would have lost Rs 50,000. But according to the latest norms, he will be eligible for a refund even if exits the policy after a year. If the insurer has received the premium for the full year, they have to return Rs 31,295 to the policyholder, Kumar added.

How will the policyholder know about their special surrender value?

The regulator has asked the insurer to mention policy-wise guaranteed surrender values (GSV), special surrender value (SSV) and payable surrender values separately in the benefit illustration. It is now mandatory for the insurers to provide a customised benefit illustrations to prospective policyholders along with a prospectus while selling a policy. The benefit illustration must be signed by both the potential policyholder and the insurance agent, intermediary representative, or insurer employee involved in the sales process. This signed document will become part of the policy document, the regulator said.

So, you need to check the policy benefit illustration carefully to understand guaranteed surrender values (GSV), special surrender values (SSV) and surrender values that will be paid when you return the policy.
Irdai asked insurers to implement this special surrender value rule by September 30, 2024.

Life insurance new rules: Who gets the benefit of special surrender value norms?

This move is in favour of the policyholders. Those who are stuck with the wrong product due to rampant mis-selling that has become quite prevalent in the insurance sector will get a higher amount back now.
The new surrender value norms introduced by Irdai will apply primarily to new endowment policies issued after the implementation of the guidelines, says Rakesh Goyal, Director Probusinsurance.com.