It is always better to convert your endowment policy to paid-up instead of surrendering it in case you want to close it for some reason
Insurance protection is crucial for a family to overcome the financial losses caused by the death of its breadwinner. For life insurance, the thumb rule is to take insurance coverage amounting to 10 times the current annual income. That said, one may feel the need to discontinue an existing endowment plan owing to some issue. If that’s the case, what are the things that you need to keep in mind?
The process is comparatively straightforward in the case of a term insurance plan. You simply stop paying your premiums and let your policy lapse.
However, endowment plans combine insurance and savings benefits. If the insured dies before the maturity of the policy, the nominees get the sum assured. If the insured survives the policy tenure, he gets maturity benefits. If you exit an endowment policy before its maturity, the saved corpus is impacted.
Discontinuing endowment policy
You can abandon your insurance in two ways. Either convert your policy into a paid-up policy by not paying the premium after the mandatory period; or, surrender the policy and get the surrender value from the insurer. In both cases, you must pay the premium until the end of the mandatory period. It can be two to three years depending on the policy’s terms and conditions. If you close the plan before the mandatory period, you will lose all value.
Converting to paid-up policy
If you choose to stop paying the premium after the mandatory period and convert your regular policy into a paid-up one, your insurance won’t expire. You will remain insured but with a lower sum assured. If you survive the policy tenure, you will get the maturity proceeds. If you die during the tenure, your nominee will receive the adjusted sum assured which will be in proportion to the premiums paid. For example, if you take a policy with a sum assured of `10 lakh with a premium of `50,000 for 20 years and discontinue it after paying for five years, the sum assured will reduce to `2.5 lakh as the policy converts to a paid-up policy.
Option to surrender the policy
Surrendering the policy is another option. You can ask the insurer to close the policy and pay you the surrender value. The insurer charges a penalty for surrendering of the policy before maturity. This penalty could be harsh. Usually, if you surrender the policy in its third year, you will get around 30% of the entire premium paid. If you surrender between the fourth and seventh years, the surrender value will be about 50% of the premium paid.
As you surrender the policy closer to the maturity period, the surrender value will be higher in percentage terms. After the seventh year, insurers have the discretion on how much amount they will pay back during a policy surrender. Policies will vary from one insurer to another. It is good to know the surrender value before you take an endowment plan. Suppose you pay a premium of `50,000 per year, and if you surrender the policy in the third year, you will get only `45,000 since you have paid a total of `1.5 lakh. If you surrender in the sixth year, you will get `1.5 lakh (50% of total premium paid) since you paid a total premium of `3 lakh.
It is better to convert a policy to paid-up as surrendering your policy exerts a huge cost on your finances. Consider these factors before deciding on discontinuing your endowment policy.
The writer is CEO, BankBazaar.com