Surrender Value of LIC – On October 1, 2024, significant changes will take effect in the insurance sector under the newly issued IRDAI (Insurance Regulatory and Development Authority of India) Master Circular. These changes cover a wide range of policies, including life insurance, general insurance, and health insurance. The new circular has introduced several new norms, which have generated many questions and concerns from policyholders and insurance agents alike.
One of the most pressing concerns relates to the surrender value of life insurance policies—especially whether the new surrender value norms apply to existing policies or only to new policies issued after October 1, 2024. This article will address these concerns, as well as explain other essential concepts introduced in the IRDAI Master Circular, such as Guaranteed Surrender Value, Special Surrender Value, Paid-up Value, and the revised moratorium period.
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Changes Introduced by the IRDAI Master Circular 2024
The IRDAI Master Circular 2024 brings sweeping reforms to various aspects of life insurance policies, especially concerning the surrender value of policies. The most notable change is the introduction of the Special Surrender Value, which now accompanies the previously existing Guaranteed Surrender Value. These reforms were primarily made to ensure that policyholders get better returns even if they choose to surrender their policies prematurely.
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Guaranteed Surrender Value
In traditional life insurance policies like endowment and money-back policies, the Guaranteed Surrender Value has always been a critical element. It refers to the minimum amount a policyholder is guaranteed to receive upon surrendering the policy, provided they have paid the premiums for a minimum duration—typically two or three years. Previously, policyholders could expect to receive between 30-35% of the total premiums paid if the policy was surrendered within the first few years. This percentage would increase to around 50% if the policy was surrendered after four to seven years of premiums, and it could go up to 90% if only two years were left in the policy term.
While this guaranteed value provided some level of security, it often fell short of the expectations of policyholders, especially those who had to surrender their policies early for financial reasons. Recognizing this, IRDAI introduced the Special Surrender Value to complement the existing Guaranteed Surrender Value, giving policyholders the potential for better returns.
Special Surrender Value
The introduction of the Special Surrender Value is one of the most significant changes in the IRDAI Master Circular 2024. Unlike the Guaranteed Surrender Value, the Special Surrender Value offers policyholders an additional amount based on specific calculations. This value is determined by the paid-up value of the policy plus any bonuses accumulated during the policy’s active years, multiplied by a surrender factor (typically 30%).
The formula for calculating the Special Surrender Value is as follows:
Special Surrender Value = (Paid-up Value + Bonus) × 30%
To better understand this, let’s consider an example:
- Sum Insured: ₹3,00,000
- Annual Premium: ₹15,000
- Policy Term: 20 years
- Years of Premium Paid: 1 year
- Bonus Accumulated: ₹8,000
In this case, the paid-up value would be calculated as:
Paid-up Value = (Sum Insured × Years of Premium Paid) / Policy Term
Paid-up Value = (3,00,000×1) / 20
Paid-up Value = ₹15,000
The Special Surrender Value would then be:
Special Surrender Value = (₹15,000 + ₹8,000) × 30%
Special Surrender Value = ₹6,900
This formula allows policyholders to receive a more favourable return when surrendering their policies compared to the older Guaranteed Surrender Value.
Applicability of the New Surrender Value Norms
A key concern among policyholders is whether the new surrender value norms introduced by IRDAI apply only to policies issued after October 1, 2024, or also to existing policies. This uncertainty has led to a flood of questions, calls, and emails from customers to agents, especially those who are considering surrendering their policies.
From the available information, it appears that these changes will not apply to existing policies issued before October 1, 2024. Instead, the new surrender value norms, including the Special Surrender Value, will apply exclusively to policies purchased after this date. Existing policyholders will continue to be governed by the terms and conditions outlined in their original policy documents, including the old norms for Guaranteed Surrender Value.
This clarification is crucial because many policyholders are concerned that their policies’ surrender values might be affected by the new rules. As per the IRDAI guidelines, amendments cannot be made to life insurance policies that have already been issued, except for updates to contact information like phone numbers or email addresses. Therefore, existing policies will not see any changes to their surrender value norms, and the Guaranteed Surrender Value as stated in the original policy document will still apply.
Understanding Paid-up Value
Another critical concept introduced in the IRDAI Master Circular 2024 is the paid-up value of a policy. Paid-up value comes into play when a policyholder stops paying premiums after a certain period. The policy does not lapse; instead, it is converted into a paid-up policy, where the sum insured is reduced proportionally to the number of years the premium was paid.
For example, if a policyholder purchased a policy with a sum insured of ₹3,00,000 for 20 years but paid premiums for only one year, the paid-up value would be calculated based on the ratio of years the premium was paid (1 year) to the policy term (20 years), which results in a much lower sum insured.
Paid-up policies are eligible for surrender, and the surrender value is calculated based on the paid-up value plus any bonuses accrued during the policy’s active years.
The Revised Moratorium Period
The IRDAI Master Circular 2024 also includes significant changes to the moratorium period. Initially introduced by IRDAI in 2020, the moratorium period was set at 8 years. It provided that after a policyholder had paid premiums for eight consecutive years, the insurance company could not reject any claim based on non-disclosure of pre-existing conditions, provided the non-disclosure was unintentional.
Under the new circular, the moratorium period has been reduced to 5 years, making it easier for policyholders to secure their claims. Additionally, continuity under the moratorium period will now count towards portability from one insurance company to another.
However, it is crucial to understand that the moratorium period does not protect policyholders who intentionally hide critical illnesses or other major health conditions when purchasing a policy. If it is discovered that a policyholder intentionally withheld crucial information, the insurance company retains the right to reject claims even after the moratorium period has passed. In such cases, the insurance company may not only deny the claim but also cancel the policy and file legal action against the policyholder.
Conclusion: Important Considerations for Policyholders
The IRDAI Master Circular 2024 brings several changes that are designed to improve transparency and offer better returns to policyholders, particularly when it comes to surrendering their policies. However, it is essential for policyholders to understand that these changes will primarily apply to policies issued after October 1, 2024. Existing policies will continue under their original terms and conditions, including the Guaranteed Surrender Value.
Moreover, policyholders should be aware of the implications of the paid-up value and the Special Surrender Value when they decide to discontinue a policy. The introduction of these new concepts aims to provide better financial outcomes, but each policyholder’s situation will be different based on their policy type and the number of years premiums were paid.
Lastly, the revised moratorium period should be viewed as a safeguard against unintentional omissions of health information but should not be relied upon as a way to deceive insurers. Policyholders are advised to disclose all relevant information when purchasing a policy to avoid complications down the road.
These changes represent a step forward in the regulatory framework for life insurance in India, and policyholders should familiarise themselves with the new norms to make informed decisions about their policies.
Also see:
- IRDAI New Circular for Life Insurance
- IRDAI New Guidelines for LIC
- IRDAI New Guidelines for General Insuranc
- IRDAI New Guidelines for Health Insurance Companies
- IRDAI Revised Master Circular on Insurance Policies
FAQs about Surrender Value of LIC
Will the new surrender value norms apply to existing life insurance policies purchased before October 1, 2024?
No, the new surrender value norms outlined in the IRDAI Master Circular 2024 will only apply to life insurance policies issued after October 1, 2024. Existing policies will continue to follow the terms and conditions specified at the time of purchase.
What is the difference between Guaranteed Surrender Value and Special Surrender Value?
Guaranteed Surrender Value is the amount guaranteed by the insurer if a policyholder surrenders the policy after a certain period, typically after paying premiums for 2-3 years. Special Surrender Value, on the other hand, is calculated based on the paid-up value of the policy, plus any accrued bonuses, and is a new provision introduced by IRDAI in the 2024 circular.
How is the Special Surrender Value calculated?
The Special Surrender Value is calculated by adding the paid-up value of the policy (based on the number of premiums paid) to any earned bonuses, and then applying a percentage determined by the policy’s terms. For example, if the paid-up value is ₹15,000 and the bonus is ₹8,000, the surrender value might be calculated as 30% of the total (₹6,900 in this case).
What changes have been made to the moratorium period under the IRDAI Master Circular 2024?
The moratorium period has been reduced from 8 years to 5 years. This means that after paying premiums for 5 years, no claims will be rejected due to non-disclosure of certain facts, provided the non-disclosure was unintentional. However, deliberate fraud or misrepresentation will still result in claim denial and potential legal action.
Can a policyholder surrender a life insurance policy after paying premiums for just one year under the new rules?
Yes, under the new IRDAI rules, a policyholder can surrender their life insurance policy after paying premiums for just one year. The Special Surrender Value will be calculated based on the paid-up value after one year and any accrued bonuses. However, the surrender value will be significantly lower compared to policies surrendered after multiple years of premium payments.
Disclaimer: The information provided in this article is intended for general informational purposes only and should not be construed as professional advice. The content is based on the author’s understanding of the IRDAI Master Circular 2024 and its potential implications. For specific guidance regarding your policy, always consult your insurance provider or a qualified insurance advisor before making any decisions.