IRDAI Regulates Life Insurance: New Clause Calls for Larger Premature Exit Payouts

IRDAI has mandated higher special surrender value payouts for policyholders prematurely exiting endowment plans, overruling insurers' objections. Payouts will now match at least the present value of paid-up benefits.

The Insurance Regulatory and Development Authority of India or IRDAI has come up with new regulations that would increase the special surrender value to be paid to policyholders of life insurance who surrender their endowment insurance policies prematurely.

In a bid to safeguard the interests of consumers, the new guidelines require that insurers provide a surrender value of at least the present value of the pay, the sum assured and any other future income benefits like cash pay out.

This is a far better situation than the current status where policyholders lose all the money paid in form of premium if they decide to surrender the policy before one year. In this case, they will get back part of their premiums for an early exit under the new set of rules.

“Policyholders will now receive much higher surrender values than what was possible earlier; especially those who surrender their policies during the first few years of policy when one has already paid hefty premiums,” said an actuary of a large life insurer.

The move was not welcomed by the life insurance companies who had insisted that higher surrender means higher reserves and more capital would be needed. They had suggested that the right action would have been to pay back premium in cases where mis-selling was established.

But IRDAI dismissed all these with most of the provisions being agreed and finalised from the draft circular that was released last month. It has given a limited relaxation of allowing a spread of 50 bps over the 10-year G-Sec yield to determine the discounted surrender values.

Customer advocates have applauded the new measures that protect and empower customers by preventing aggressive policy surrender charges and misleading sales tactics such as mis-selling.

Also Read: X to charge money for posting, liking and commenting to tweets from new users

Besides, the guidelines increase the surrender payout to policyholders and make it compulsory for the insurers to issue a summary called the Customer Information Sheet enclosed with the policy documents that outlines the benefits, premiums, and terms, among others, in plain language.