IRDAI Retains High Surrender Value for Life Insurance Policies: Blow to Insurers, Boon for Policyholders?

The Insurance Regulatory and Development Authority of India (IRDAI) has finalized regulations on surrender value, the amount paid by life insurers to policyholders who cancel their policies early. This decision comes after multiple rounds of discussions with industry stakeholders.

High Surrender Value Retained Despite Industry Pushback

Life insurance companies, particularly HDFC Life and Max Life with a high focus on non-participating policies (more prone to surrenders), had lobbied for lower surrender values. However, IRDAI has largely maintained its stance on increased payouts.

What is Special Surrender Value (SSV)?

SSV is a higher value than the Guaranteed Surrender Value (GSV) mandated by IRDAI. It considers factors like bonus rates and prevailing interest rates to offer a more fair payout to surrendering policyholders.

Understanding the Impact: A Policyholder Example

Let's consider a 10-year life insurance policy with a sum assured of ₹1 lakh and an annual premium of ₹10,000. At maturity, the policyholder would receive ₹1.5 lakh, including a ₹50,000 bonus.

Assuming a 10-year Government Security yield of 7% with a 50 basis point cushion offered by Insurance Regulatory and Development Authority of India (IRDAI), here's how surrender value would be calculated if the policy is surrendered after the first premium payment:

• Paid-up Sum Assured: 0 (no paid-up value for surrendering after one premium)

• Present Value of Paid-up Sum Assured + Bonus: ₹10,000 (initial premium) + ₹5,000 (bonus) = ₹15,000

• Discounted Value of Future Benefits: ₹15,000 / (1.075)⁹ ≈ ₹7,823 (present value of remaining premiums)

Total Surrender Value (higher of GSV or SSV): While the specific GSV is not provided, the final SSV in this example is approximately ₹7,823.

Timeline of IRDAI's Decisions on Surrender Value

• December 2023: IRDAI proposed a significant increase in GSV, facing strong opposition from insurers.

• March 2024: IRDAI decided to maintain existing GSV levels.

• April 2024: IRDAI expressed plans to increase SSV.

• May 2024: IRDAI proposed a framework for increased SSV, with insurers seeking relaxations.

• June 2024: IRDAI finalizes regulations, keeping SSV at elevated levels.

Surrender Value Under Different Proposals

• December 2023 Draft Proposal: Life insurers would have paid ₹8,300 on a ₹10,000 premium as surrender value, equating to 83% of the premium received.

• Guaranteed Surrender Value (GSV): Life insurers would pay ₹3,000 on a ₹10,000 premium, approximately 30% of the premium received.

• Special Surrender Value (SSV) Proposal: Life insurers would pay ₹8,159 on a ₹10,000 premium, around 82% of the premium received.

• Final Regulations: Life insurers will pay 78% of the total premium received as surrender value to policyholders.

The final regulations require life insurers to pay around 78% of the total premium received as surrender value to policyholders.