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Life Insurance: Surrender and annuity norms made customer-friendly

Saikat Neogi
Life Insurance, Surrender norm, annuity norm, customer friendly, insurance regulator, benefits, 

The insurance regulator has revised the surrender and annuity norms in both linked and non-linked life insurance products. The minimum death benefit, revival period and norms of pension products have also been revised to make them more customer-friendly.

Death benefits

For all non-linked life insurance products, or traditional products, the minimum sum assured on death during the entire term of the policy will not be less than seven times the annualised premium in case of a regular policy. For single premium policies, it will be 1.25 times the premium. For participating products, in addition to the sum assured on death, the bonus and additional benefits as stated in the policy and accrued till the date of death will be payable as part of the death benefit.

In case of linked products, the death benefit will be the sum assured as agreed in the policy plus the balance in the unit funds. The sum assured in case of a single premium policy will be 125% of single premium; in case of regular premium policies, it will be seven times the annualised premium. In case of death due to suicide within 12 months from the date of commencement of the policy or from the date of revival of the policy, the beneficiary will be entitled to the fund value as on the date of intimation of death.

Policy term

The minimum policy term for non-linked products will be at least five years. However, insurers can design a range of policy terms for individual policies, subject to a minimum policy term of one month. Insurers can also extend an option to a policyholder to alter the premium paying term. In case of linked-products, the minimum policy and premium paying term will be for five years, except for single premium products.

Pension products

The regulator has made some changes to insurance pension products on the lines of the National Pension System. All individual pension products will have explicitly defined assured benefit payable on death and vesting. The assured benefit will have at least one guarantee: either non-zero positive rate of return on the premium paid, excluding applicable tax, or an absolute amount to be paid on death or maturity. On surrender or vesting of pension products, the policyholder can utilise the entire proceeds to purchase annuity or deferred annuity from the same insurer at the prevailing annuity rate.

Alternatively, the policyholder can commute up to 60% and utilise the rest to purchase immediate or deferred annuity from the same insurer or from a different insurer. This will be on the lines of NPS, where 60% of the maturity proceeds can be withdrawn tax-free and the rest invested in annuity.

In case the policyholder dies during the deferment period, the nominee can either utilise the entire proceeds or part of the policy to purchase an immediate annuity or deferred annuity from the same or a different insurer. Alternatively, he can withdraw the entire proceeds of the policy. In case the proceeds of the policy are not sufficient to purchase minimum annuity, then the money can be paid as lump sum.

Surrender value

All protection-oriented non-linked products will have guaranteed surrender value. If the premium has been paid for two consecutive years, the policy will acquire a guaranteed surrender value. It will be 30% of the total premium paid less any survival benefits already paid, if surrendered during the second year of the policy. In case the policy is surrendered during third year, it will be 35% of the total premium paid, less any survival benefits. If surrendered between the fourth and the seventh year, then it will be 50% of the total premium paid. In case it is surrendered during the last two years of the policy, then the policyholder will get back 90% of the premium paid.

At present, in a traditional plan which bundles investment with insurance—such plans account for 80% of all policies sold—the policyholder loses all her money if it is not renewed in the second year. If one surrenders after year 2 and 3, the insurer pays back only 30% of the total premium. Between year fourth and the seventh year, the surrender value is 50% of the premium paid. After eighth year, the surrender value increases.

The fact that 35% of life insurance policies sold are not renewed in the second year—this non-renewal rises to 67% after the end of fifth year—is symptomatic of the widespread misselling in the life industry where policyholders do not find any merit in the insurance cover or are simply not able to pay the premium. Poor persistency levels or higher lapsation means people are paying huge surrender costs.