The Insurance Regulatory and Development Authority of India (IRDAI), is a statutory body formed under an Act of Parliament, i.e., the Insurance Regulatory and Development Authority Act, 1999 (IRDA Act, 1999) for overall supervision and development of the Insurance sector in India. Its primary objective is to protect policyholder interests, ensure fair practices, and foster growth and innovation in the insurance sector. By implementing policies, guidelines, and reforms, IRDAI aims to create a robust and transparent insurance framework while enhancing consumer confidence and industry competitiveness.
The new product regulations issued by the Insurance Regulatory and Development Authority of India (IRDAI) became effective on 1 April 2024. Following this, a Master Circular was released in June 2024, providing detailed guidance on the regulatory requirements. Insurers were required to modify their existing products to comply with these regulations by 30 September 2024. Included amongst the key changes are revisions to surrender values for non-linked insurance products and the mandatory provision of insurance policy loans for all non-linked savings products offering surrender value. The insurer may also offer a policy loan facility under annuity products with a ‘Return of Purchase Price’ option, based on the eligible surrender value.
Understanding IRDAI new guidelines for insurance
The Insurance Regulatory and Development Authority of India (IRDAI) has introduced new guidelines for calculating surrender values, focusing on enhancing fairness and transparency for policyholders. Here's a detailed breakdown of the key changes, their implications on policyholders. Before you choose Mera Kal for your financial needs, it’s important to know what the latest IRDAI guidelines are.
Key Points of IRDAI New Guidelines and Their Impact on Policyholders
Surrendering policyholders are now ensured a more reasonable and equitable value, safeguarding their interests without compromising the benefits of continuing policyholders. Thus, if you have an existing policy, insurers are required to review and update surrender values to meet the latest regulations which means you are likely to receive updated and fair surrender benefits if you choose to exit.
These measures promote long-term policyholder satisfaction and help strike a balance between short-term liquidity and long-term benefits.
Special Surrender Value and Guaranteed Surrender Value:
The surrender value of your policy depends on two main components:
- Special Surrender Value (SSV): Determined by the insurer and can vary based on market conditions and policy performance.
- Guaranteed Surrender Value (GSV): A regulatory minimum that policyholders are assured to receive upon surrender. Typically, the higher of SSV or GSV is paid.
- Higher Guaranteed Surrender Value (GSV):
- Policyholders now stand to benefit from potentially higher Guaranteed Surrender Values, as insurers are permitted to offer amounts above the regulatory minimum.
- These values may vary depending on factors such as the size of the premium, the term of premium payment, and the policy's duration, allowing for greater flexibility and returns for policyholders surrendering their policies.
- Improved Special Surrender Value (SSV):
- Policyholders gain enhanced fairness with the revised SSV, ensuring that surrender values are aligned with the expected present value of:
- The paid-up sum assured for all covered contingencies.
- Paid-up future benefits, including income benefits (if applicable).
- Accrued or vested benefits, considering survival benefits already paid.
- SSV becomes payable after the first policy year if one full year's premium has been paid, offering earlier access to accrued returns for policyholders.
- For single-premium policies and those with shorter premium payment terms (less than five years), SSV becomes payable immediately after one premium payment, providing more liquidity for such policies.
- Annual reviews of SSV, based on prevailing 10-year government bond yields plus a spread, ensure that policyholders benefit from market-aligned values.
- Potential Impact on Maturity Payments or Income Benefits
- Policyholders should be aware that the introduction of increased surrender benefits, such as higher Guaranteed Surrender Values (GSV) and Special Surrender Values (SSV), may lead insurers to adjust other policy benefits to balance their margins. This could result in a potential reduction in maturity payouts or income benefits for certain policies.
Insurers are required to provide Benefit Illustrations, which include policy year-wise details of Guaranteed Surrender Value (GSV), Special Surrender Value (SSV), and the total surrender values payable. These illustrations ensure complete transparency, enabling policyholders to clearly understand their policy benefits and make confident decisions.
However, understanding and estimating surrender values can be daunting for policyholders.
Try Mera Kal’s free Surrender Value Calculator to instantly estimate your policy’s surrender value. This tool demystifies the process, empowering policyholders to make informed decisions regarding their insurance policies.
Impact on Loan Eligibility
- Higher Surrender Values Enable Larger Loan Amounts: As GSV and SSV rise with policy maturity, policyholders gain access to higher loan values. By continuing with your policy, you unlock greater liquidity.
- Transparency for Easier Loan Planning: Benefit illustrations help users assess policy value and loan eligibility with ease.
- Ease of Obtaining Loans Against Policies:
The transparency introduced by the IRDAI, such as the requirement for insurers to provide year-wise benefit illustrations (showing GSV, SSV, and surrender values), makes it easier for policyholders to understand the potential value of their policy. This clarity helps policyholders assess their eligibility for a loan against the policy and plan accordingly.
Explore our Loan Eligibility Calculator to understand how much you can borrow today.
Image of Year-wise benefit illustration for LIC’s Jeevan Labh Plan (A Participating, Non-Linked, Life, Individual Savings Plan).
You can find the benefit illustration from the provided link (Page 10 - Benefit Illustration) to add a better visible screenshot –
You can visually interpret how the LIC policy surrender value grows over time and use the same to determine loan eligibility.
Potential Implications of New IRDA Guidelines for Policyholders
- Financial Implications for Policyholders Who Rely on Loans Against Their Policies:
With the revised guidelines on GSV and SSV, policyholders have more transparency but need to understand their policy benefits:
a. For example, consider your LIC Jeevan Labh (Plan 736) policy with a policy term of 16 years and premium paying term of 10 years.
- For this policy, GSV in the 2nd year is 30% of total premiums paid, and the total premiums paid so far amount to ₹1,00,000, the surrender value will be ₹30,000. If the loan eligibility is set at 90% of the surrender value, you can borrow up to ₹27,000.
b. However, in later years (e.g., after the 10th year), GSV increases to 61.25% and above (to a max of 90% in the 16th year) of total premiums paid, significantly increasing your loan eligibility. For instance, with ₹5,00,000 in premiums paid and a GSV of 61.25%, your surrender value would be ₹3,06,250 allowing a loan of ₹2,75,625 at 90%.
c. This illustrates how patience and continued premium payments can lead to greater financial flexibility.
- Importance of Reviewing One’s Insurance Portfolio:
With the changes introduced by IRDAI, it’s more important than ever to monitor and manage your insurance portfolio:
a. Assess Surrender Value Growth: If your policy has a GSV of 30% in Year 2 and increases to 61.25% by Year 10, you can plan your financial needs accordingly. For instance, if you paid ₹50,000 in premiums, your surrender value would grow from ₹30,000 in Year 2 to ₹3,06,250 in Year 5, offering higher loan potential over time.
b. Leverage Year-Wise Benefit Illustrations: Use the benefit illustration provided by your insurer to forecast GSV, SSV, and loan potential year by year. For example, knowing that a loan of ₹2,75,625 might only be available after 10 years helps align your financial planning with policy growth.
Tips for Policyholders
- Read your insurance documents carefully—note how GSV/SSV applies to you.
- Consult your financial advisor or reach out to our expert team at hello@merakal.in.
- Understand loan options and liquidity potential before deciding to surrender.
Conclusion
IRDAI's new surrender value guidelines mark a significant step forward in enhancing policyholders' financial flexibility. IRDAI’s updated surrender value norms empower policyholders with:
- Higher and more transparent surrender values.
- Mandatory loan provisions on non-linked savings products.
- Better clarity through year-wise benefit breakdowns.
Remember, surrendering a policy remains a last-resort option. In most cases, taking a loan against your LIC policy is a better way to unlock liquidity without sacrificing your long-term coverage.Staying informed about these updates is crucial to making the most of the new opportunities they present.
Use the Mera Kal Surrender Value Calculator and Loan Eligibility Tool today to make the most informed decision.
At Mera Kal, we don’t just facilitate a loan against life insurance policy for you, but also help you with the necessary information about the same. Visit us to know more.