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Surrender of a life insurance policy is a premature withdrawal from the contract by the policyholder to get the available cash value, known as surrender value.
In the retail line of business, LIC has been losing market share consistently and it currently has just around 35% of the share.
Authored by Prof. Manoj K Pandey:
Although a life insurance policy is a financial asset, it lacks the option of reasonable exit/liquidity. The only option is to surrender it to the issuing company as per their dictated terms, thereby making a loss. The policy’s surrender also terminates the continued life coverage and stops the commission payment to advisors.
Surrender of a life insurance policy is a premature withdrawal from the contract by the policyholder to get the available cash value, known as surrender value. The surrender value is just a fraction of the inherent policy value as of the date. This amount depends on how long the policy has run against its stated tenure. In initial years, it is a heavy loss proposition for the customers and an element of profitability for life insurance companies.
Though this practice of imposing a heavy penalty on customers breaking the contract has been highlighted as a measure against thrift, all stakeholders have not appreciated it. IRDAI, the insurance regulator, has been working on it and has instructed life insurance companies to improve the payouts substantially and implement it from October 1, 2024. This instruction impacted the share prices of listed life insurance companies as they feared an erosion in their profitability.
INNOVATIVE ALTERNATIVE
In light of these limitations, an innovative alternative for assigning a Life Insurance Policy brought in by an Indian-based company is making news these days, more so because the big daddy LIC is opposing it with all its might. The company is targeting only LIC policyholders with an endowment class of policy who have made up their minds to surrender it for cash value. In its offer, the company promises the same cash value to the policyholders should they assign (transfer of ownership) their policies to them.
This company’s business model is to continue the policy by paying all the future premiums & getting future benefits as promised in the policy contract. They also promise to share a part of the proceed with the nominee, should there be a death claim in that policy. This could not have been possible had it been surrendered to LIC. A huge advantage is also coming to the advisors involved as they continue getting their commission & this whole model ensures better persistence for the life insurance sector. It is essential to know that around 50% of the policies lapse before completing five years & it has been a serious concern for the industry.
On the face of it, the offer looks win-win for all the stakeholders, and then the question arises as to why LIC is opposing such an alternate liquidity option by issuing an advisory to its policyholders. Perhaps it is fearful of the mass involvement of their advisors as they would encourage their customers to go for assigning their policy & then try to sell another policy, which could even come from a rival company. In the retail line of business, LIC has been losing market share consistently & currently, it has just around 35% of the share.
FEAR OF ILLEGALITY
The fear of illegality has no basis. The Supreme Court has upheld the right of policyholders to assign their policies for such transactions. It must be obvious that not having proper regulation around an innovation does not amount to illegality. Regulations follow innovations, which is a bitter truth.
This company’s offer also does not fall under the “trading of policy” category, which is not allowed in India. Their business model is all about a single assignment transaction in favour of their trust, well regulated by concerned authorities, and there is no further change in the ownership of the policy to any third party. All other related benefits, as mentioned above, are additional fringe benefits adding value to the whole system.
The financials around this company’s business proposition are heavily dependent on LIC’s good track record of bonus declarations for its endowment class of life insurance policies and the sovereign guarantee attached to them. Senior officials have acknowledged this in the public domain. With the new surrender value norms getting placed soon, their margin is bound to dip in the future.
The life insurance sector has been the backbone of our economy, with around Rs 70 lakh crore of AUM under its belt. In this era of fast innovation, it cannot continue with old rules and regulations, which are often not so customer-friendly. It is time for the regulator to see the changing necessities and bring regulations around this “liquidity” concern to protect the interest of the policyholders.
(The author is an associate professor at BIMTECH. The views expressed here are strictly personal. Prof Pandey has also served in LIC as an officer)
