How new surrender rules will impact life insurance policy returns
Starting October 1, traditional life insurance policyholders will see a dip in their returns, because of some new rules on guaranteed surrender value. If you have a non-participating policy, expect your returns to drop by about 0.3-0.5%. And if you're on a participating policy, you'll notice your bonus payouts getting smaller over time. This change is pretty much in sync with the ongoing trend of falling government bond rates.
New regulations offer guaranteed surrender value from 1st year
The new rules will give policyholders a guaranteed surrender value from the very first year, even if they've only paid one annual premium. This is a shift from the old rule, which only offered this benefit after the second year. However, these changes will lead to lower returns for those who keep their policies for a longer time.
Impact of new surrender rules on bonus rates
These new rules are going to hit non-participating products right away, but for participating policies that offer bonuses, we'll only see the effects in the coming years. Industry experts are already predicting a long-term dip in bonus rates because of these changes. One executive from a listed life insurance company pointed out that the difference in government bond rates from the 10th to the 30th year creates risks, when it comes to giving policyholders government bond credit as surrender value.
Insurers to adjust internal rate of return
Despite a dip in government bond rates from 7.10% to 6.8% over the past four months, insurers have stuck to the internal rate of return (IRR) on their products. But with these new regulations coming in, companies are likely to lower their IRRs to keep up with the current interest rate scene. "Many insurers have not yet adjusted their product IRRs despite the fall in G-Sec rates," said Rushabh Gandhi, MD and CEO of IndiaFirst Life.
Insurers may revise commission structures
To protect their profit margins, insurers might think about changing up their commission structures. Some could go for a 50-25-25 payout model, where agents get half their commission in the first year, and the rest is split between the second and third years. Others might choose trail-based commissions, which spread out the payouts over the policy term. This way, they can handle the financial hit from early surrenders a bit better.
