3 Ways to Surrender Life Insurance Policy

Financial planners advise that one should carefully assess one’s need for insurance and the features of a policy before signing on the dotted line. An insurance plan bought in a hurry to save tax or sold by some insurance agent or bank executives persuaded are common situations.  What should you do if you have already bought an insurance policy? What are the exit options? – The option is to surrender life insurance policy.

surrender life insurance policy

Those who are wondering whether they should surrender their traditional life insurance policies have the following options.

  • Let the Policy Lapse
  • Turn It into a Paid-up Plan
  • Surrender the Policy

In this article, we shall discuss these options in detail.

Let the Policy Lapse

If you stop paying your insurance premium it discontinues the policy, which in insurance terminology is called the policy lapse. On policy lapse

-One loses protection cover.

-In the case of money-back policies & endowment plans, if you have paid the premium for the policy for less than 3 years and decide to discontinue it, you will receive no benefit for the money you have paid as premiums.  In the case of term plan, you will not get any premium back at any time. The insurance company will retain all the premiums paid. You don’t get anything back and all your premiums paid to go waste.

Letting the policy lapse might be the preferred option if you had bought the traditional insurance policy (endowment, money-back) just 1-2 years ago. You will have to forego the premium paid in the first couple of years, but it is better than continuing with it and compounding the error.

Turn It into a Paid-up Plan

When you make a policy paid up,

– You don’t have to pay any more premiums & that does not cancel your policy.

– Instead, the policy continues till maturity with a reduced Sum Assured. This means that you would be halting future contributions to the policy, but still let it run to maturity. The reduced sum assured is called the Paid up value of the policy.

Paid up value is calculated as a proportion of premiums paid versus the premiums actually needed to be paid.

– If you have bought an insurance policy with additional benefits such as future bonuses and dividends, these would be lost in such a policy. However, you would retain any bonuses paid out before you made the policy “paid-up” and would be paid at maturity (end of the policy term) or on death, whichever is earlier

– Riders such as Accident benefit and critical illness riders do not acquire any paid-up value.

– Many traditional products offer final additional bonus (FAB) as an incentive to stay with the policy. The FAB, if associated with your policy, given at the end of the policy term, will not be given for paid-up policies. See LIC’s web page for BonusInformation

Paid Up Value

If you stop paying the premium after a specified period, your policy will continue but with lower sum assured. This reduced sum assured is called paid-up value or paid-up sum assured.

Paid-up value is calculated by multiplying the original sum assured and the ratio of the number of premiums paid to the number of premiums payable.

Paid Up Value = Original sum assured * (No. of premiums paid / Total no. of premiums that were required to be paid)

Total Paid Value = Paid Up Value + Bonus

Let take an example, suppose you pay Rs 25,000 annual premium on a quarterly basis, and the sum assured is Rs 5 lakh for a policy term of 20 years. If you stop paying premiums after 3 years, then

No. of premiums paid = 4* 3 = 12

Total value of the premiums paid = 25,000 * 3 = 75,000

Total no. of premiums that were required to pay = 20* 4 = 80

The paid-up value will be = Rs 5,00,000 X (12/80) =75,000

You will get this value at maturity or in the case of unfortunate death your nominee will get this sum.

Surrendering the policy

Surrender life insurance policy means exiting from the policy before the maturity. The voluntary termination of the insurance by the policyholder before the maturity or premature encashment of the life insurance policy.  When you surrender life insurance policy:

– The life cover or protection ends.

– Guaranteed surrender value – You are eligible to receive this if you have paid a premium for at least three years.

  • In the case of regular premium policy, Guaranteed Surrender value of LIC policy is 30% of the basic premiums paid and any bonuses that may have accrued till then. Also, the company excludes the first year’s premium while calculating surrender value. The closer you are to the maturity date of your policy, higher the amount you get when you exit. Towards the end of its term, this can be as high as 80% of the premium.
  • In the case of Single premium policy, LIC of India surrender value is 90% of the premium (single premium) paid. It excludes the extra premiums (if any).

– If any extra premium is paid towards Accident benefit etc, it is usually excluded.

How to Calculate Surrender Value:

The amount you get after discontinuation of the policy is called the special surrender value. This is arrived at by multiplying (total paid-up value + bonus) with a multiplier called the surrender value factor.

The surrender value factor is a percentage (%) of (paid-up value + bonus). It is zero for the first three years and keeps increasing from third year onwards. It differs from company to company and depends on various factors.

Different companies use different approaches to decide the surrender value factor. The surrender value is calculated by the insurance company depending on the time for which the policy was in effect (the age of the policy), the total duration of the policy, the premiums paid and any bonus accumulated.
Not all companies declare the surrender value factor in the product brochure or on their website.

Special surrender value =
{Basic Sum Assured X (No. of Premiums Paid/Total No, of Premiums Payable) plus total bonus received} X Surrender Value Factor.

Earlier, we calculated the paid-up value as Rs 75,000. Assuming that the bonus is Rs 60,000 and the surrender value factor in the 3rd year is 25.18 per cent, then the special surrender value = 25.18 per cent (Rs 75,000+Rs 60,000) = Rs 33,993.

Conclusion –

If you surrender life insurance policy completely then you may bear some loss in the form of surrender charges, but you will be out of these kinds of very high locking period, low liquidity, and low insurance products. If you are in initial few years then you can think of exiting but if you have gone long then you should work out all things & then take your final decision and invest the future premiums, in the products most suited to your financial needs.

These days almost all insurance policies are of 15-20 years of the term, you deserve much better returns for investing for such a long time frame. And as far as insurance requirement is concerned you can buy it through Term life insurance plans. By taking short term loss you may divert your money to good, suitable products such as mutual funds, which will pay you much more in long term and cover up all the losses that you are taking now.

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