Early insurance exit still costly, pension plans take after NPS

Though nothing may have changed to substantially improve the returns from traditional insurance-cum-investment policies—you know them as endowment and money-back plans—you may get a slightly better exit route in case you wish to surrender your policy early.

The exposure draft that was put out by the Insurance Regulatory and Development Authority of India (Irdai) last week proposes that all traditional plans will now acquire a surrender value after you pay two premium instalments. So if you surrender after the second premium, you will get some money back. Surrender before that and you go empty-handed, as rules allow insurers to levy a 100% surrender charge.
Currently, if you buy a policy with a term of over 10 years, you are eligible for a surrender value only after three years. This is down to two years. Also, the quantum of how much the insurer has to return has increased slightly from 30% to 35% of the premium paid. In addition, the guaranteed surrender value will comprise the surrender value of any bonus—which is now defined as at least 30% of it—accrued to the policy.
Unlike the current product regulations that allow insurers to file surrender values after the seventh policy year, the draft exposure states that surrender value should follow a smooth progression and converge to at least 90% of the premiums as the policy approaches maturity. In other words, even when you are close to maturity, you may not get the entire money back. “From a customer standpoint the good aspects are that minimum surrender values have increased slightly in the early years and are clearly defined in outer years,” said Kapil Mehta, co-founder, Secure Now Insurance Broker Pvt. Ltd.

But surrender costs continue to remain high despite the fact that serious concerns were expressed by the product review committee. “About 61% of the policies don’t stay till the end of 5 years, and with nearly 80% of the industry’s product mix sold in the traditional product category, this (heavy surrender charge) has put the industry’s reputation at risk, affecting the viability of the business,” the committee report said.

Traditional plans remain products with the high cost of surrender. There is good news for pension products. The draft proposes to increase the commutation money—the amount you can withdraw at maturity as a lump sum—from one-third or 33.33% of the maturity corpus to 60%. Currently, up to 33.33% of the corpus can be withdrawn and the remaining two-thirds or 66.66% needs to be mandatorily used to buy an annuity product.
Now imagine a situation where other fixed-income products look more appealing than an annuity, but your money is stuck in the latter. The proposal, therefore, gives more flexibility.
Source: Live Mint