Surrender Policy

What is surrender policy?

In life insurance, surrender policy meaning, a voluntary termination of a life insurance policy by the policyholder before its maturity date or expiration. When a policyholder surrenders their policy, they typically receive a surrender value, which is the cash value of the policy minus any applicable surrender charges.

Why surrender a policy?

So while it is very much beneficial & it highly suggested to hold on till the maturity, Policyholders may choose to surrender their policy for various reasons, such as:

1. Financial difficulties: Unable to pay premiums.

2. Change in financial goals: No longer need the coverage.

3. Alternative investment options: Better investment opportunities elsewhere.

4. Lapse in premium payments: Missed premium payments leading to policy lapse.

A total amount of ~Rs. 2,29,245 Cr surrendered/withdrawn by policy holders in FY23-24 in India. I.e. close to 40% of the total benefits paid by the life insurance companies in FY23-24 

It is extremely important to understand the surrender charges/discontinuous charges before purchasing any Life Insurance with maturity benefits. 

Unfortunately, The surrender charges are very complex to understand and many ignore or blindly trust the sales person/agent while purchasing the life insurance. In some cases, the sales person/agent themselves are not aware or don't understand these surrender charges.

When there is a need for withdrawal, they might end up paying huge surrender charges.

Types of surrender:

1. Full surrender: Complete termination of the policy, with the policyholder receiving the surrender value.

2. Partial surrender: Withdrawal of a portion of the policy's cash value, while keeping the policy in force.

Implications of surrendering a policy:

1. Loss of coverage: Termination of life insurance coverage.

2. Surrender charges: Fees deducted from the surrender value.

3. Tax implications: Potential tax liabilities on the surrender value, If you withdraw before the 5 year Lockin period, The Capital Gains (if any) are taxable.

4. Impact on future insurability: May affect ability to obtain new coverage.

Before surrendering a policy, it's essential to carefully review the terms and conditions, consider alternative options, and consult with a financial advisor or insurance expert to ensure an informed decision.

What is surrender value in Life Insurance?

Surrender value meaning, it is the amount the insurance company pays to the policyholder when he/she decides to terminate the plan before maturity. If the policyholder decides on a mid-tenure surrender, then the sum distributed towards earnings and savings would be given to the policyholder.

Read more about Surrender Value

Should you surrender your policy?

Surrendering a life insurance policy is a major financial decision that requires thoughtful consideration. While the surrender value can provide quick access to cash in times of emergency or shifting financial priorities, it also involves losing the life protection. To make an informed decision, it’s important to understand what surrender value means, how it’s determined, and which types of policies include it. Key factors such as how long the policy has been in force, the number of premiums paid, accrued bonuses, and any applicable surrender charges all influence the final amount you may receive.

If you're thinking about surrendering your policy, carefully evaluate the advantages and disadvantages in light of your current financial situation, long-term goals, and insurance needs. Consider using tools like a surrender value calculator, explore alternatives such as policy loans or converting to a paid-up policy, and seek guidance from a financial advisor if necessary. Read about Policy Assignment.

What is the right time to Surrender your Policy? 

Before surrendering your life insurance policy, it’s important to take into account your financial needs, the available surrender value, and other potential alternatives. Generally, a policy becomes eligible for surrender under the guaranteed surrender value clause after at least three years of premium payments. If you choose to surrender the policy after this period, you may receive around 30% of the total premiums paid. For guidance tailored to your specific situation, consulting a financial advisor is strongly recommended.

Summary:

A surrender policy refers to voluntarily terminating life insurance policy before the maturity, receiving a surrender value in return. This surrender value is the cash value of the policy minus applicable surrender charges. Surrender charges can be complex and significant, so understanding them before purchasing a policy is crucial. Consult a sound advisor before surrendering a policy to make an informed decision.

Regards,

Honvest Team.