Insurance is usually taken for getting risks covered as well as for financial security. However, sometimes one may have to surrender one’s insurance policy before maturity for various reasons, including financial problems and availability of better options. But is it wise to surrender one’s policy? More importantly, if there is no option left other than this, then what needs to be looked at and what precautions need to be taken?
Insurance experts say that the surrender process of every insurance policy depends on the kind of policy invested in. Customers need to remember that any insurance policy, if surrendered prior to the completion of the lock-in period, entails surrender charges. However, every policy has differing surrender charges that depend on the kind of policy, premium-paying term and the extent of premium paid.
“It is possible to surrender a policy before maturity or lock-in period, though the same is not advisable. Financial stress or distressing problems may cause some people to consider surrendering their policy before it reaches maturity, thus, resulting in low returns,” says Santosh Agarwal, Head of Life Insurance, Policybazaar.com.
However, while some types of insurance policies provide some surrender value, that is not the case with some other policies. For instance, if someone had bought a term insurance policy, then the concept of surrender value does not exist unless it is a limited or single pay policy where premiums for the entire policy term are paid in advance. But a term policy should not be surrendered as life cover will immediately cease.
Similarly, “policyholders having ULIPs must consider surrendering the policy only after completion of the entire five-year lock-in period. This will allow greater scope for the corpus to grow over the period. The ULIP holders may then consider relieving their corpus sans any payment of extra charges,” says Agarwal.
Endowment policies also have a three-year lock-in period. One cannot surrender an endowment plan before the completion of the lock-in period. Such policies, if surrendered during the initial phases, result in greater loss of the premium paid. One can view the surrender chart, corresponding to the policy bought, and decide accordingly.
However, “one must consider surrendering an endowment policy only if the surrender value received and re-invested in another product promises better returns than that would have been earned on the surrender policy on completion of its tenure. As an alternative, one may make the policy paid up and stop paying future premiums. The sum assured will be reduced to a proportion of premiums paid till date and number of times premiums have been paid,” informs Agarwal.
How to calculate paid-up value
Paid-up value is usually calculated as the [(number of paid premium × sum assured) / total number of premiums]. Hence, the policy will continue with reduced benefits, though there is not much to lose. For example, suppose the sum assured of a policy term limited to 21 years is Rs 10 lakh corresponding to Rs 50,000 yearly premium and has paid only three premiums. Since the total policy term is 21 years, the total number of premiums that had to be paid is 21. The paid-up value in such a scenario may be calculated as (3 * 10, 00,000)/21= Rs 1,42,857 (Rs 1,40,000 approximately).
Agarwal says that surrendering a policy unnecessarily not only results in the consumers losing all the advantages associated with the insurance scheme, but also a surrender value much lesser than the amount invested.
One must, therefore, exercise caution while surrendering any policy and take into consideration if the goal with which the policy was taken has been fulfilled or if an alternate option generates better returns. In addition, factors including surrender value, returns, premium paid and nature of liabilities must be taken into account.