I hope the IRDA does not revisit the cap on surrender charges that it has proposed on all life insurance policies from July. The insurance industry (especially the private insurers) has strongly opposed the proposal. LIC is not worried as it does not charge anything for surrenders.
In the draft guidelines, the Insurance Regulatory and Development Authority (Irda) has suggested that the surrender charge during the first year of the policy be fixed at 12.5 per cent of the premium paid in case the policy term is less than 10 years. For longer duration policies, the charge is proposed to be capped at 15 per cent.
The regulator moved to cap surrender charges after a complaint filed with its Ombudsman said a policyholder did not get any money after he surrendered his policy in the first year.
“If the surrender charge is capped, policyholders will not face high penalty on withdrawing. This will encourage them to surrender even within the first three years of lock-in,” said the chief executive officer of a life insurance company.
“There was a discussion on surrender charges in the council meeting and insurers expressed their discomfort with the cap,” said Life Insurance Council Secretary General S B Mathur.
I fail to understand the convoluted logic of the CEOs of the private life insurers. I look at them as crybabies who are crying hard to protect their turf, even if it means something which is not in favour of their customers!!
The reason the private life insurers are crying hoarse is because their lapsation ratio is very high. This means that the policies being sold by them are not being renewed. So naturally, there’ll be a lot of requests for surrender.
Fact: LIC, the Daddy of Life Insurance industry has aboslutely no surrender charges!
While on surrender and lapsation, here’s another issue that’s very important. It’s about the turnover of Agents.
Source: Annual Report, IRDA: In 2008-09, while the total number of agents appointed was 12.89 lakhs, the number of agents terminated was as high as 8.72 lakh. The scenario was worse for private insurers as compared to LIC. While private insurers appointed 9.43 lakh agents, they terminated 6.77 lakh agents. On the other hand, LIC has terminated 1.95 lakh agents while it appointed 3.46 lakh agents. Such high turnovers may have negative consequences.
This means that the policies procured by these agents are rendered orphan on their termination and thereafter often result into lapsation due to lack of servicing support.
This also goes on to show that your friend and relative who shoved an insurance policy in you name may not be there when you need him for service issues.
And if you decide to surrender your policy, the private insurer is making a lot of noise over returning your money!!