Life insurance surrender charges: Why is it a bone of contention between LIC and agents?

Why are LIC agents upset?

The genesis of the confrontation lies in the new surrender charge rule that came into effect from October 1, 2024. That is, existing policies were refiled to comply with the Insurance Regulatory and Development Authority of India’s new product norms.

Policies issued after April 1 are already compliant. “LIC withdrew old plans and we received a circular on October 1 detailing the changes to the commission structure. In the first year, agents were entitled to 25 percent commissions in endowment plans. In addition, a bonus of 40 percent (of the commission) was also paid out. Now, however, the first year commission has come down to 20 percent. Overall, this means our commission earnings for new business will go down from 35 percent to 28 percent,” said Shyamal Chakraborty, national president, Life Insurance Agents’ Federation of India-1964.

Then, there is the introduction of the clawback clause, where the commission paid is recovered from the agent if a policyholder makes an early exit. “If a doctor treats a patient for two years and later the patient says he is not happy with the treatment and wants the fees back, will it be fair?” argued Chakraborty.

Also read: New IRDAI rules: Life insurance policyholders to get higher early-exit payouts from October 1

What is the course of action that agents have planned?

Chakraborty said they will be meeting LIC officials on October 29 to find a solution. “If our issues are not resolved, we plan to intensify our protests. We also plan to write to the finance ministry and stage protests at Parliament,” he said.

There are others who have opted for a wait-and-watch approach. Some others believe LIC may not go ahead with the clawback clause for now. "This was the primary concern—that LIC will recover the commission paid to us in the first year, if the policyholder surrenders the policy. But we have been told that the corporation is yet to take a call on the implementation of the clawback clause. So for now, we do not intend to go ahead with any agitation," said a veteran Mumbai-based LIC agent.

How have surrender value rules contributed to the current standoff?

Part of the larger product regulations, the new special surrender value norms have lowered the barriers for policyholders wanting to make a premature exit. In simple terms, compared to the older regime, the special surrender value—the payout on premature exit—for endowment policyholders  because of mis-selling or inability to pay premiums will go up under the new regulations.

Unlike before October 1, when policyholders stood to lose the entire premium paid if they exited after paying the first premium, they will now get a part of their premium back. For insurers, their margins in the non-participating, guaranteed-return category of endowment plans will be the most affected.

However, some life insurers, besides experts, backed the new regulations, asserting that policyholders would benefit, as many tend to let their policies lapse in the early years.

“At heart, the higher surrender value regulations treat the policyholders fairly (both lapsed and persistent), and prevent the insurers from excessively rewarding distributors at the expense of lapsed policyholders. The surrender value clause  (after paying one annual premium) will force insurers to link commissions with persistency by moving to trail-based commissions, or having a claw back provision for the first year's commission, in case of early surrender,” Avinash Singh, senior research analyst, Emkay Global, said in a note issued after the master circular's release. This could, theoretically, curb cases of mis-selling to an extent.