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Want to surrender your life insurance policy? Here's a guide

If you are confused about what will happen on surrendering your life insurance policy, here's everything you need to know about it.

, ET Bureau|
Updated: Oct 01, 2018, 10.23 AM IST
If you surrender traditional plans and invest the premium in equity funds, you will earn more despite the loss of premiums paid. Suppose a 30-year-old buys four 20-year endowment plans with covers of Rs 3 lakh each, paying a combined annual premium of Rs 60,000.

In both the cases, where he loses the entire premium and where he gets a surrender value, he will earn a higher sum by investing in equity for the remaining duration.

Case A: If you surrender before 3 years, say, after paying premium for two years
Premium loss: Rs 1.2 lakh
Maturity amount received if policy carried to full term @ 6%: Rs 20.29 lakh
If you invest Rs 60,000 in an equity fund @12% for 18 years: Rs 35.25 lakh
Earning in 18 years despite premium loss: Rs 34.04 lakh

Case B: If you surrender after paying premium for 5 years
Premium loss: Total premium paid(Rs 3.6 lakh) minus Surrender value*( Rs 52,000) = Rs 3.08 lakh
If you invest Rs 60,000 in an equity fund @12% for 15 years: Rs 23.57 lakh
Earning in 15 years despite premium loss: Rs 20.49 lakh
*Actual surrender value can vary marginally.

Also Read: How much is too much to invest in any asset class

If you are confused about what will happen on surrendering, go through these questions:

What’s surrender value?
In case of life insurance, if you surrender a policy before the completion of its full term, you could get back a portion of the money you paid as premium, after deducting charges. This money is surrender value.

Do I get surrender value in all life policies?
No, surrender value accrues only in policies that have a saving or investment component, besides insurance. So, pure term plans will not acquire any surrender value, while traditional plans like endowment and moneyback, as well as Ulips, will.

Does surrender value accrue if I stop paying the premium?
No. You will get a portion of your money only if you have paid consecutive premiums for two years (if premium paying term is less than 10 years), and three years (if premium paying term is more than 10 years). If you surrender before this, you do not get back any money.

Can I stop paying the premium but continue with insurance?
Yes, you can convert the plan into a paid-up policy, but only after paying the premium for 2/3 years. So you stop the premiums but the cover continues till maturity. The cover size will be reduced and will be proportional to the premiums paid. This sum assured is called the paidup value. It is calculated using the following formula:

Paid up value = Original sum assured x(No. of premiums paid / No. of premiums payable)

How much money will I get back in traditional plans?
If you have paid premiums for 2/3 years, there are two types of surrender values that accrue.

a) Guaranteed surrender value: You are guaranteed a fixed percentage of premiums paid depending on when you surrender.
  • If you close after 2/3 years, you will be ensured 30% of premiums paid.
  • If you close between 4 and 7 years, you will get 50% of premiums paid.
  • If you surrender in the last two policy years, you can get up to 90% of premiums.
b) Special surrender value: This surrender value depends on the sum assured, bonuses, policy term and premiums paid. It can be calculated by using the following formula:
Special surrender value = (Paid-up value + bonus) x Surrender value factor*
*Surrender value factor is a percentage of paid-up value plus bonus.

How much money will I get back in Ulips?
Before lock-in period: If you stop paying the premium before five years, the policy will lapse. After deducting some charges the remaining fund value will move to Discontinuance Fund, where it will earn 3.5% till five years, when you get the total amount.

The discontinuance charges range from a high of Rs 6,000 if closed in the first year to Rs 2,000 if discontinued in the fourth year, and nil after this. A fund management charge is also levied, which cannot exceed 0.5% of the fund value per annum.

After lock-in period: No charges are levied and you can get back the fund value.

Also Read

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