Life insurance acts as a financial cover in case of a contingency linked with the policyholder’s life. Contingencies such as death, disability, accident, etc. Be it due to natural cause or accidental, we are subject to risks of death and disability, and having a life insurance policy helps financially if anything happens to the policyholder.
Life insurance policies pay an amount/sum assured based on the loss of income in future years of the policyholder. Having said that, at times one may have to surrender one’s policy for various reasons, be it for financial problems or for the availability of better options. Surrendering a policy comes with various strings attached. The surrender process of an insurance policy depends on the kind of policy the policyholder has invested in. If a policyholder surrenders one’s policy before the maturity date/lock-in period, he needs to pay surrender charges. The surrender charges also vary depending on the type of policy, premium paid and the total premium paying term.
Rakesh Goyal, Director, Probus Insurance Broker, says, “All insurance policies do not have a surrender value. Hence, a customer needs to first ensure that their policy does offer a surrender value.” In case of a term insurance policy, there is no surrender value, unless the policy is a limited or single pay policy, wherein the policyholder has paid the entire premium for the policy term in advance. Endowment policies, on the other hand, come with a lock-in period of 3 years, and surrendering an endowment plan before the completion of the lock-in period results in greater loss of the premium paid. Policyholders with ULIPs should consider surrendering their policy after completion of the 5-year lock-in period, if possible. This way the corpus will get a greater scope to grow over the period.
Even though your policy might have the option to surrender before the maturity date, experts suggest it is not ideal to do so. Usually, there are two types of surrender value — guaranteed surrender value and special surrender value.
The guaranteed one is calculated as a percentage of the premium paid till the time of surrendering excluding the first year’s premium and the rider premium if any. The percentage varies as per the number of years for which the premium is paid. This usually ranges from 30 to 90 per cent of the premium paid. The life insurance policy’s illustration shows the guaranteed surrender value for all the year. Hence, one can also check the illustration to know the surrender value.
The special surrender value is calculated on the sum assured, accrued bonuses if any, policy term and the total premiums paid so far. Goyal of Probus Insurance says, “A customer can quickly find out the special surrender value by multiplying the surrender value factor with the sum of paid-up value and bonus.” Note that the surrender value factor varies from insurer to insurer. It is better for the policyholder to speak to their respective insurance company or agent to know the surrender factor value.
Keep in mind that surrendering a policy will make you lose all the advantages associated with the insurance scheme, and you as the policyholder will also get back lesser money as surrender value than the amount invested. Hence, do not surrender your policy unnecessarily.