No surrender charge from 5th policy year: IRDA

Insurance regulator IRDA on Thursday asked life insurers not to levy any charge on customers if they surrender their policies from fifth year.

"No surrender charge can be levied by an insurer for policies surrendered from the fifth policy year and thereafter the policyholder will be entitled to receive the full fund value on such surrender," the Insurance Regulatory and Development Authority (IRDA) said in a circular to all life insurers.

Moreover, IRDA gave some breather to insurers by excluding the charges levied by these firms on their customers for incidents like death and disability from overall limit on charges on their ULIP schemes, the products that are invested in the capital markets.

"Mortality and morbidity charges may be excluded in the calculation of the net yield," IRDA said.

Mortality is the probability of death, while morbidity is the probability of disability. The insurance companies levy mortality and morbidity charges on the customers and these charges increase with the age of the policyholders.

"It will positively impact customers benefits. The exclusion of mortality and morbidity charges from the cap will ensure that there is no compromise on growth in sales of valuable life cover," Max New York Life Insurance Sr. Director and Chief Marketing Officer Debashis Sarkar said.

Last month, IRDA put a cap on overall charges that life insurance companies can levy on subscribers of their Unit Linked Insurance Policies (ULIPS).

For those products which have maturity of 10 years, insurance companies have to maintain the difference between gross yields and net yields at 300 basis points.

When various charges levied by insurers are added on to net yield, it becomes gross yield.

"The difference between gross yield and net yield cannot exceed more than 300 basis points," IRDA had said.

IRDA further said that fund management charges should not exceed 135 basis points irrespective of the tenor of the contract.

There were demand by the life insurance industry to exclude mortality and morbidity charges out of the cap.

IRDA said that certain concerns were expressed by the industry on the circular issued last month and meeting of the life insurers with IRDA took place on 29^th July to discuss all these issues.