What are the new insurance cancellation fees?
Under the latest regulations set out by the regulator, return values will remain largely unchanged compared to existing return charges. “The IRDA (Insurance Products) Regulations 2024 largely maintain the status quo as far as return values of non-linked or linked life insurance products are concerned,” Emkay Global said in its research report.
Here are the suggested buyback value percentage slabs:
1) 30% of total premiums paid if they opt out in the second year.
2) 35% of total premiums paid if they opt out in the third year.
3) 50% of the total premiums paid if surrendered between the fourth and seventh year.
4) 90% of total premiums paid if ceded in the last two years.
For example, if a policyholder paying a premium of Rs 1 lakh for a policy wants to surrender it after two years, she will get only 30% of the premiums paid till then. So she will be entitled to get back only Rs 60,000 after paying two annual premiums of Rs 2 lakh.
Cut in transmission charges that didn’t materialize: What IRDAI proposed in December
The final return charges are at odds with the “threshold” return value proposed by the regulator earlier in December. It was aimed at reducing surrender charges on traditional plans so that policyholders would get more money back if they prematurely exited the policy.
What was the previous offer? According to the draft IRDAI regulations, “There shall be a certain premium threshold for each product at which there shall not be any return charges levied on the balance of premiums beyond these limits irrespective of the time of return.” This means that there will be a threshold limit up to which transmission charges will apply. Any amount above the threshold limit will be refunded to the policyholder.
Following the above example, if the policyholder wanted to surrender the policy after paying premiums for two years, here is how surrender charges would be calculated under the proposal:
Assuming the threshold value for a policy with an annual premium of Rs 1 lakh is Rs 25,000, according to a research report by Emkay Global.
When she returns the policy after two years, she will receive the “adjusted guaranteed surrender value.” It will be calculated as follows
1) Redemption value of threshold limit (Rs 25,000*2*30%) = Rs 15,000
2) Premiums paid above threshold limit = (Rs 75,000*2*100%) = Rs 1.5 lakh
So the ‘adjusted guaranteed return value’ will be Rs 1,65,000.
As you can see, if the proposal was accepted, the policyholder could get Rs 1,65,000 back after two years, instead of Rs 60,000, as per the existing return charges. In this case, the return value can reach up to 175%.
Higher surrender value norms: Relief for insurers, setback for policyholders
Most life insurance companies opposed the previous draft proposal, citing asset and liability management issues.
While the status quo on surrender charges is good news for insurance companies, customers are unlikely to get any significant relief. “(This move) is a major departure from the Dec. 23 exposure draft. This status quo provides great relief to life insurers who otherwise had the difficult task of balancing the impact of increased surrender value on lapsed customers by tinkering with distributor payouts, ensuring continued policyholder benefit and maintaining shareholder profitability (VNB margins) ” said Emkay Global.
Those who are left with an insurance policy can take advantage of the previously proposed rules.
“IRDAI in its latest gazette notification has maintained the status quo after building hope for policyholders by releasing a consultation paper to increase surrender value for life insurance policies in December 2023. So customers will continue to get zero surrender value in the initial years , if they decide This step is in favor of the insurance company but not in favor of the policy holders as many of them, to avoid sunk costs, will continue in these long term life insurance policies that offer very low coverage at a high premium and low returns due to its investment component,” said Abhishek Kumar, Registered Investment Advisor (RIA) with SEBI and founder of SahajMoney.
Monika Hallan, veteran personal finance writer and chairperson of SEBI Investor Protection and Education Fund (IPEF), took to Twitter to talk about how the move is not in the best interest of policyholders. She wrote: “It is shocking that the insurance regulator has rejected a proposal for fairer value to policyholders for early returns. Now with first year commissions that can reach 100% and very high referral costs, expect to be sold more and more. What is @FinMinIndia doing?”
“Compared to the draft regulations, which offer higher return values, the actual regulations, which will come into effect on April 1, 2024, provide for a lower return value for policyholders. Knowing the mis-selling that happens in insurance products, the regulator should have been bold enough and not come under pressure from the industry. This was an opportunity to provide policyholders with a decent way out of locked-in policies that were mis-sold to them,” said Ravi Saraogi, co-founder, Samasthiti Advisors and SEBI RIA.
“We believe that more flexibility for policyholders is a good idea and having high surrender charges creates an obstacle to that flexibility. It would therefore be preferable for surrender charges to be lower so that policyholders have more choice as to how they wish to deal with their insurance policies in the event of changes in their financial circumstances,” says Vishal Dhawan, Certified Financial Planner and Founder of Plan Ahead Wealth Advisors.