- Date : 14/06/2020
- Read: 5 mins
Find out what happens when life insurance is surrendered before the maturity date and how to do it
A life insurance policy remains active for a specific number of years. However, the policyholder can choose to discontinue the policy before it reaches its maturity date. Circumstances beyond a person’s control may develop because of which the policyholder may decide to surrender the policy. If you want to know when should you surrender life insurance, it should only be when you have no access to other liquid assets and need money urgently. The policy may or may not have a surrender value. If it is a term policy, there is no question of surrender value, but if it is, let's say, an endowment or money back policy, the policyholder is paid the fund value after deducting the surrender charge.
Here are a few things that you need to know about what happens when life insurance is surrendered.
What is the process?
The standard process of policy surrender is to contact the insurer and submit a surrender request form along with documents like original policy papers, identity proof, a cancelled cheque or latest bank statement, PAN card etc. Based on your request and documents, a decision is made, and the surrender value is paid to you.
Related: Life insurance 101-Everything you want to know about life insurance
What is surrender value factor?
It is the amount that the policyholder is entitled to get out of an insurance policy in case he or she decides on a mid-term surrender of the policy. The withdraw cash surrender value is arrived at after deducting a surrender charge from the policy fund, i.e. savings and earnings thereon. The surrender charge varies from policy to policy.
What is duration criteria?
In case, there is an endowment policy which is less than 10 years in premium payable duration, you will have to pay consecutive premiums for at least two years. In case the premium paying term is more than 10 years, the premium must be paid for at least three years consecutively. If this condition is fulfilled, the policyholder can get a surrender value. A policy can also be converted to a paid-up policy if the premium for two or three years has been paid. The coverage of the policy will reduce proportionately, as will the paid-up value.
Paid-up value will be the number of premiums paid/number of premiums payable multiplied by the original sum assured.
How does the surrender value vary?
The surrender charge will depend on the type of policy. The charge is higher if the saving or investment component of the policy is low. Term insurance plans do not have any surrender value, unlike unit-linked insurance plans, endowment plans, or money back plans.
What is surrender value in case of traditional plans?
If the policyholder has paid a premium for 2 or 3 years, he or she will be eligible for the surrender value, which can be calculated in one of two ways.
In case of guaranteed surrender value, a fixed percentage of the premium paid is guaranteed, depending on when you surrender your policy. If the policy is surrendered within 2 or 3 years, you will receive 30% of the premium paid. If surrendered between 4 to 7 years, 50% of the premium paid is received. Similarly, if the policy is surrendered during the last two years of the policy, you will be eligible for 90% of the premiums paid.
In the case of special surrender value, the surrender value depends on the sum assured, bonuses, policy term and not just for the premium paid. A surrender factor is calculated as a percentage of paid-up value and bonus. The formula for special surrender value is(paid-up value + bonus) x surrender value factor. The surrender value factor is calculated as percentage of paid-up value and accrued bonus.
Related: How to decide the nominee for your life insurance?
Can you surrender term life insurance?
A term insurance policy lapses if the premium payment stops. Stopping premium payment is risky because of risk cover ceases. By knowing the pros and cons of a term plan, you will be able to make an informed decision about whether or not you should surrender your term policy. Besides, you will also know all about term insurance meaning, what is term insurance, when to buy one and so on. Cost-wise there are no complications or disadvantages to surrendering a term plan.
What is surrender value in case of ULIPs?
If you stop paying the premium for a ULIP policy, the policy lapses and the fund value, minus some charges, move to a discontinuance fund for the remainder of the five years. It continues to earn 3.5% per annum during its stint till five years are completed, at the discontinuance fund. A discontinuance charge starting from Rs 6000 for discontinuation in the first year to Rs 2000 for discontinuation in the fourth may be applicable. A fund management charge not exceeding 0.5% per annum will also applicable, deducted on an annual basis. However, no such charges are applicable if you stop paying the premium after the lock-in period.
Before you surrender a policy, it is important to take a step back and consider the purpose for which you took the cover in the first place. Ideally, if you are letting that cover go, you must have an alternate plan to meet the desired target or purpose. For example, if it is an education plan for your child, it would be ideal if you have another plan to build the fund your child’s higher education. Besides, you will also have to consider the financial implications of surrendering the insurance policy. Have a look at how life insurance can support your long-term goals before you surrender your policy.
