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IRDAI has proposed introduction of a new method to calculate surrender value for existing policyholders. The proposed formula ensures that policyholders get better surrender value if they exit midway.
The surrender value is the amount that the policyholder receives from the insurance company if they decide to terminate their policy before its maturity.
The new method will have a premium threshold defined for each product. Simply put, insurers cannot impose surrender changes on these threshold limits irrespective of the timing of the surrender.
Let us look at the revised calculation to know more:
a) A non-linked savings insurance policy with an annualized premium of Rs.1 lakh and policy term of 20 years. Assuming a threshold limit of Rs. 25,000, the adjusted guaranteed surrender value after payment of third annualized premium may be as follows:
i. Guaranteed surrender value for threshold premium: Rs. 25,000 x 3 x 35% = Rs. 26,250
ii. Premium refund beyond threshold premium: Rs. (1,00,000 – 25,000) x 3 = 2,25,000
iii. Adjusted Guaranteed surrender value: (i) +(ii), i.e. Rs. 2,51,250.
iv. Surrender value shall be higher of (Adjusted guaranteed surrender value, Special surrender value)
b) A non-linked savings insurance policy with an annualized premium of Rs. 1 lakh and policy term of 20 years. Assuming a threshold limit of Rs. 25,000, if the policy is surrendered in the first policy year, the adjusted guaranteed surrender value after payment of first annualized premium may be as follows:
i. Guaranteed surrender value for threshold premium: Zero
ii. Premium refund beyond threshold premium: Rs. (1,00,000 – 25,000) x 1 = 75,000
iii. Adjusted guaranteed surrender value: (i) +(ii), i.e. Rs. 75,000
iv. Surrender value shall be higher of (Adjusted guaranteed surrender value, Special surrender value)
