New Life Insurance Rules from October 1: Key Changes for Policyholders

New Life Insurance Rules in Effect: Key Changes for Policyholders

Starting October 1, new regulations have been introduced that reshape the landscape of life insurance. These changes, which apply to both participating (par) and non-participating (non-par) traditional policies, will offer policyholders greater flexibility but may lead to reduced returns over time.

One of the most notable updates is the introduction of a guaranteed surrender value from the very first year of the policy, even if only one annual premium has been paid. Previously, policyholders could only access a guaranteed surrender value after two years. While this provides more flexibility for those wishing to exit their policy early, there are potential trade-offs. Experts predict a drop in returns for non-par policies, expected to fall between 0.3% and 0.5%, while par policies will likely see a reduction in bonus payouts over time.

How Surrender Values Are Calculated

The new rules tie surrender values to government bond (G-Sec) rates, making fluctuations in these rates a key factor in determining the policy’s value over time. As insurers try to maintain their bonus and return levels amidst varying G-Sec rates, it could become challenging, especially as the rates fluctuate over the years.

Impact on Non-Participating Policies

The effects on non-par policies will be felt immediately. Due to the fall in G-Sec rates — from 7.10% to 6.8% over the past four months — insurers are expected to reduce the internal rate of return (IRR) on these products. According to Rushabh Gandhi, Managing Director and CEO of IndiaFirst Life, insurers are beginning to adjust their product IRRs to align with these new norms. "We anticipate a recalibration of IRRs as insurers adapt to the latest surrender regulations," Gandhi shared with The Economic Times.

Changes in Participating Policies

For par policies, the effects will take longer to become noticeable but are expected to manifest in the coming years. As G-Sec rates play a significant role in calculating surrender values, maintaining consistent bonus payouts may prove difficult, leading to a gradual decline in bonuses.

One industry executive explained the issue, stating, "The difference in G-Sec rates between the 10th and 30th policy years presents a challenge in maintaining credit as surrender value. Over time, this will likely lead to lower bonus payouts for par policies."

Impact on Insurance Company Practices

In response to these new rules, insurers are expected to revise their commission structures. Some companies may shift toward a "50-25-25" model, where agents receive 50% of their commission upfront in the first year, and the remainder is spread out over the next two years. Others may introduce trail-based commissions, which distribute payments over the policy’s entire term, allowing insurers to better manage early surrenders and align with the new regulatory environment.

Gandhi also mentioned that insurers would likely need to rework their commission strategies, incorporating potential deferrals, clawback provisions, or reductions in response to these changes.