Surrendering insurance policy early may cost you less in future
Irdai) has proposed new rules to safeguard the interests of policyholders. Under these rules, insurance companies will have to increase the amount they pay to customers who choose to discontinue their policy early.
The new rules would put insurers in a dilemma — they must either lower sales or lower profits to address premature policy closures.
If insurers cut commissions to make room for higher payouts, it could impact sales. On the other hand, if they retain commissions or pay higher ones, they will suffer a loss in profits.
The regulator has not set a specific threshold value, but in an example, indicated that the surrender value would need to increase nearly 1.8 times the current level in the second year and 0.8 times higher in the fifth year.
Sources told the Times of India that the objectives behind this move are to curb mis-selling by encouraging insurers to spread out commissions, which are currently concentrated in the first year, and to incentivize insurers to improve policy persistency.
These new rules are part of Irdai's proposed insurance product regulations, which have been shared with insurers. According to the draft circular, each product will have a defined premium threshold beyond which no surrender charges will be imposed, regardless of the timing of the surrender. The proposed threshold for surrender charges is much lower than what many companies currently deduct from insurance policies.
