New Surrender Value Norms for Life Insurance
Surrender value is the amount paid by the insurance company to policyholders if they stop paying further premiums due for any reason. IRDAI has recently issued new surrender value norms for traditional endowment policies. These norms are applicable starting from October 1, 2024. Let's understand what these norms are and how they are going to impact policyholders in the long run.
Key Takeaways
- New surrender value norms are applicable starting from October 1, 2024.
- These new surrender values are beneficial for policyholders.
- Surrender value is available for policyholders after payment of a one-year premium or a single premium.
- Insurers must show surrender value illustration to policyholders.
What Are the New Surrender Value Norms for Life Insurance Issued by IRDAI?
As per new surrender value norms issued by IRDAI, life insurance companies have to offer higher surrender value to policyholders even if they have paid a one-year premium. Earlier, no surrender value was paid by insurance companies when policies were returned after the first year. Now, policyholders are eligible for the surrender value even if they have paid a one-year premium or a single premium.
For better clarity, let's understand how the new surrender value will be paid to policyholders under the new norms with a simple premium illustration.
A policyholder bought a 10-year policy, paying a premium of Rs 60,000 for a sum assured of Rs 6 lakhs. As per existing norms, they would not have received any value or refund if they stopped paying the premium. But as per the new surrender value norms, guaranteed surrender value is paid to them even if they have paid a single premium.
Surrender Value Calculation as per New Surrender Value Norms
| Annual Premiums - Rs 6,00,000 | Sum Assured - Rs 6,00,000 | Bonus - Rs 1,20,000 | ||||
|---|---|---|---|---|---|---|
| Year | Premium | Total Premiums Paid | Bonus | Paid-up Sum Assured | Present Value | % of Premium Paid |
| 1 | Rs 60,000 | Rs 60,000 | Rs 12,000 | Rs 72,000 | Rs 37,554 | 62.59% |
| 2 | Rs 60,000 | Rs 1,20,000 | Rs 12,000 | Rs 1,44,000 | Rs 80,736 | 67.28% |
| 3 | Rs 60,000 | Rs 1,80,000 | Rs 12,000 | Rs 2,16,000 | Rs 1,30,194 | 72.33% |
| 4 | Rs 60,000 | Rs 2,40,000 | Rs 12,000 | Rs 2,88,000 | Rs 1,86,624 | 77.76% |
| 5 | Rs 60,000 | Rs 3,00,000 | Rs 12,000 | Rs 3,60,000 | Rs 2,50,770 | 83.59% |
| 6 | Rs 60,000 | Rs 3,60,000 | Rs 12,000 | Rs 4,32,000 | Rs 3,23,496 | 89.86% |
| 7 | Rs 60,000 | Rs 4,20,000 | Rs 12,000 | Rs 5,04,000 | Rs 4,05,720 | 96.60% |
| 8 | Rs 60,000 | Rs 4,80,000 | Rs 12,000 | Rs 5,76,000 | Rs 4,98,432 | 103.84% |
| 9 | Rs 60,000 | Rs 5,40,000 | Rs 12,000 | Rs 6,48,000 | Rs 6,02,802 | 111.63% |
| 10 | Rs 60,000 | Rs 6,00,000 | Rs 12,000 | Rs 7,20,000 | Rs 7,20,000 | 120% |
After year 1, the policyholder is eligible for a surrender value. IRDAI has also asked insurers to provide the benefit illustration to the policyholder before selling them the life insurance policy. This benefit illustration has to be mentioned in the policy document.
What Were the Earlier Surrender Value Norms for Traditional Endowment Policies?
As per the earlier surrender value norms, insurance companies had to pay the surrender values to policyholders as per the below-mentioned structure:
- No surrender value in case the policy is surrendered during the first year.
- 30% value of total premiums if the policy is surrendered during the second year.
- 35% value of total premiums if the policy is surrendered during the third year.
- 50% value of total premiums if the policy is surrendered during the fourth and seventh years.
- 90% value of total premiums if the policy is surrendered during the last two years.
For better clarity, let's understand how the surrender value is paid to policyholders under the old norms with a simple premium illustration.
A policyholder bought a 5-year policy, paying a premium of Rs 60,000 for a sum assured of Rs 3 lakhs.
Surrender Value Calculation as per Old Surrender Value Norms
| Annual Premiums - Rs 60,000 | Sum Assured - Rs 3,00,000 | Bonus - Rs 60,000 | ||||
|---|---|---|---|---|---|---|
| Year | Premium | Total Premiums Paid | Bonus | Paid-up Sum Assured | Present Value | % of Premium Paid |
| 1 | Rs 60,000 | Rs 60,000 | Rs 6,000 | Rs 66,000 | - | - |
| 2 | Rs 60,000 | Rs 1,20,000 | Rs 6,000 | Rs 1,32,000 | Rs 36,000 | 30% |
| 3 | Rs 60,000 | Rs 1,80,000 | Rs 6,000 | Rs 1,98,000 | Rs 63,000 | 35% |
| 4 | Rs 60,000 | Rs 2,40,000 | Rs 6,000 | Rs 2,64,000 | Rs 2,16,000 | 90% |
| 5 | Rs 60,000 | Rs 3,00,000 | Rs 6,000 | Rs 3,30,000 | Rs 2,70,000 | 90% |
How Are New Surrender Value Norms Beneficial for Policyholders?
The new surrender value norms offer a range of benefits to policyholders, including:
-
High Liquidity
Liquidity will increase with the introduction of new surrender value norms. The higher the liquidity, the more interest people will have in buying endowment policies.
-
Flexibility
Flexibility for policyholders increases with the introduction of new surrender value norms, as policyholders can get some money even if they surrender the policy during the first year.
-
Less Deductions/Penalties
There is a huge gap between the deductions by the insurer under new norms and old norms. Under the new norms, there are fewer deductions compared to old norms.
-
Less Chances of Misselling
There are fewer chances of misselling by insurers and agents, as they might have to undergo losses if the policyholder stops paying premiums in the early policy years.
Conclusion
The new surrender value norms will be applicable from October 1, 2024. These norms are highly beneficial for policyholders as they offer high liquidity, flexibility, fewer deductions, and lower chances of misselling. When choosing a traditional endowment plan, you should consider the surrender value illustration.
We at PolicyX.com offer transparency when selling policies. If you need expert guidance regarding your policy's surrender value, you can contact us at PolicyX.com. One of our insurance experts will guide you shortly.
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