Life insurance policyholders get higher early-exit payouts

From October 1st onwards, new rules have been introduced in the life insurance industry that offer higher payouts if you exit early. This change is part of updated rules from the Insurance Regulatory and Development Authority of India (IRDAI), first announced in March, with more details given in June.

The rules already apply to new insurance products, but companies were given time until September 30 to update their existing plans to follow the new rules.

Lower Penalties for Exiting Early

In simple terms, people who have endowment policies and leave early, either because of poor sales practices or because they can’t keep up with payments, will get more money back. Before, if you left after one year, you’d lose all the premiums you had paid. But with the new policy, you’ll get part of your premiums back. Insurance companies, especially those offering guaranteed returns, might see lower profits because of this. The surrender value of unit-linked insurance policies and term plans won’t change.

Many insurance companies strongly opposed these changes back in May and June, saying that they would cause problems with managing their money since these plans are meant for the long term. They also argued that people who stay with their plans until the end would get lower returns. Some companies suggested that instead of increasing surrender values, they should give full refunds in cases of mis-selling because the costs in the early years are too high.

The discussion around surrender charges started in December 2022, and after many drafts and talks, the new rules were finalized in March 2024. A detailed circular was released in June 2024 explaining how to calculate the special surrender value.

Good for Policyholders

However, some insurers and experts think these changes will benefit policyholders, especially those who cancel their policies early. They believe the new rules are fairer to both people who stick with their policies and those who don’t. It will also discourage insurance companies from giving big commissions to agents at the expense of people who cancel early. Now, if someone leaves after paying just one premium, insurance companies will have to adjust how they pay commissions, possibly reducing cases of bad sales practices.

Simpler Information for Customers

Along with the new surrender rules, some other changes have also become applicable from October 1. For health and general insurance policies, companies will now have to include a Customer Information Sheet (CIS) with the policy documents. This sheet will explain the important details—like policy benefits, premiums, and terms—in easy-to-understand language, making it simpler for customers to know what they’re getting.

More Fines for Not Resolving Complaints

To make sure companies respond to customer complaints quickly, the IRDAI has introduced new fines. If an insurance company doesn’t follow the insurance ombudsman’s decision within 30 days, they will now have to pay Rs 5,000 a day as a penalty.

Also Read: How many types of Insurance exist in India?