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Life insurers meet to discuss IRDAI proposal on increasing surrender value
Dec 20, 2023
Finance
The insurance regulator’s proposal to increase surrender value to policyholders and reduce surrender charges has brought cheers for life insurance policyholders, but it has come as a rude shock for life insurance companies.
The move from IRDAI could pave the way for the reduction in surrender charges to one-fifth of what life insurance companies charge currently, leaving a significantly higher amount in the hands of policyholders.
Heads of life insurance companies under the banner of the Life Insurance Council met on Tuesday to discuss their views and the changes they seek in the IRDAI proposal.One of the most important concerns life insurers expressed was industry persistency levels. Since the surrender value will be higher, life insurance companies feel there could also be a significant increase in surrenders. This could lead to a drop in persistency levels for the life insurance industry.
Life insurance companies are also looking to suggest some crucial changes to the current form of the consultation paper. The biggest of them would be to distinguish between long-term and short-term policies. According to sources, life insurers feel the higher surrender value should only be given in short-term policies and not long-term policies.
Assuming a five-year short-term policy, if it’s surrendered in its third year, then three out of five premium installments have already been paid and are much closer to maturity; hence, it would make sense to provide a higher surrender value.
On the other hand, the argument for long-term policy is very different. A 10 or 15-year policy is far from maturity if it is surrendered in its third year, and hence it would not make the best case for a higher surrender value.
IRDAI’s current consultation paper does not make any distinction when it comes to giving a higher surrender value for long-term or short-term policies.
Another suggestion discussed amongst life insurance companies was to have a threshold limit for the calculation of surrender value in the form of a percentage of the total premium paid and not have the threshold value as an absolute amount.
Life insurers feel this would help the industry deliver surrender value in a better way and make them less arbitrary.
The suggestions and concerns from the life insurance players will be sent to the IRDAI soon.
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