While making important decisions in life whether financial or non-financial it may not always be possible to get them right at the first instance. Since we are humans each with a different mind-set and intellect, it may not be possible to make a correct decision at all times. But if the incorrect or wrong decisions are detected at an early stage they can be rectified in a better way with a lesser damage or loss.

Similarly, when you find that the insurance policy bought by you either out of the sales’ pitch of the insurance agent or just to save tax, is not meeting the purpose for which the policy was bought, you tend to rectify your incorrect decision. You tend to think of surrendering the life insurance policy to your insurer, whereby depending upon the number of years of premium payment, the insurer repays you a sum of money – known as the surrender value. However in most cases, you as a policyholder would have to bear a loss of more than 50% (i.e. 50% of the total amount paid as premium is deducted as a penalty). Under such circumstances many policyholders become reluctant to surrender their policy and continue with their premiums.

Citing such high charges for the surrender of an insurance policy, the Insurance Regulatory and Development Authority (IRDA), under its revised draft guidelines has proposed a Minimum Guaranteed Surrender Value (MGSV) for traditional policies, significantly higher than what is being practiced currently by insurers. Thus now if the proposed guidelines go through, an insurer will have to pay back at least the premium amount, depending upon the number of years for which the policy is in force.

These charges would be applicable to products with a premium paying term of 10 years and more, if all premiums have been paid for at least 3 consecutive years and for premium paying term of less than 10 years if all have been paid for at least two consecutive years).However, this would not be applicable to regular premium-paying, term pure-protection products such as term insurance, health insurance products and immediate annuities without death benefit.

The revised draft guidelines also state that all individual non-linked life insurance and pension products shall have in place a MGSV. Unit linked insurance plans already have a MGSV.

We are of the view that, the IRDA’s proposal to reduce the penalty amount in case of surrender of policy is a step in the right direction. Linking of the surrender value to the number of years of premium paid takes care of interests’ of both the insured as well as the insurer. Policyholders also have an option to convert their policies into paid-up policies wherein they can stop paying the premiums but the value accrued to the policyholder will be given at the end of the term of the policy. The disadvantage here is the waiting period for receiving the paid-up value of the policy.