New life insurance rules from today: What it means for you?

As of October 1, policyholders will now be eligible for a guaranteed surrender value from the first year, even if they have only paid one annual premium. However, these new regulations are expected to lower returns for policyholders over time.

In Short

• New life insurance rules effective today
• Guaranteed surrender value from first year
• Par policy bonuses to reduce over time

The new life insurance rules that come into effect today will bring significant changes for policyholders. These changes mainly affect traditional life insurance policies, both participating (par) and non-participating (non-par) plans.

As of October 1, policyholders will now be eligible for a guaranteed surrender value from the first year, even if they have only paid one annual premium. However, these new regulations are expected to lower returns for policyholders over time.

Under the new rules, policyholders can surrender their policies earlier, receiving a guaranteed surrender value right from the first year. Previously, this option was only available after the second year.

While this gives policyholders more flexibility, there are some downsides. The returns on non-par policies will drop by 0.3% to 0.5%, and the bonus payouts for par policies will also reduce over time.

These changes are based on government bond (G-Sec) rates, which are used to calculate surrender values. The gap between G-Sec rates over different years of the policy presents a challenge for insurers in maintaining the same bonus or return levels.

Impact on non-par policies

Non-par policies will see the effects of the new rules immediately. Returns for non-par policyholders will likely fall by 0.3% to 0.5%, according to industry experts. The fall in G-Sec rates, which have decreased from 7.10% to 6.8% in the past four months, will push insurers to lower their internal rate of return (IRR) on non-par products.

Rushabh Gandhi, Managing Director and CEO of IndiaFirst Life, told The Economic Timess, "Many insurers have not yet adjusted their product IRRs despite the fall in G-Sec rates. However, with the new surrender norms, we expect insurers to tweak their products, which may result in a lowering of IRRs."

For participating policies, which offer bonuses, the impact will be delayed but visible in the next few years. Bonus rates are expected to drop as the G-Sec rates influence the surrender value. This could create difficulties in providing consistent bonus payouts for those holding par policies.

An insurance company executive told ET, "The spread between G-Sec rates from the 10th to 30th year varies, and this poses risks in providing policyholders with G-Sec credit as surrender value. Over time, this could decrease bonus rates for par policies along with non-par."

Insurance companies are expected to modify their commission structures to adapt to the new rules. Some insurers may move towards a "50-25-25" commission payout model, where agents receive 50% of their commission in the first year and the rest is spread over the next two years.

Others may adopt trail-based commissions, spreading commission payouts over the policy term. This would help insurers manage early surrenders and align their financial plans with the new rules.

Gandhi added, "Insurance companies will have to adjust their commission payouts to align with the new regulatory framework, which could lead to deferrals, clawback provisions, or reductions."