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What happens when a policyholder surrenders a life insurance policy?

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One event likely to occur when a policyholder surrenders a life insurance policy is that the person loses all advantages associated with the insurance scheme. This could be because s/he has failed to fulfil the committed tenure of the policy and doesn’t pay the fixed premium levied by the insurance company to be liable to enjoy the benefits of the plan.

To enjoy the benefits of a policy on surrendering it, a policyholder needs to undergo the surrender process fixed by the insurance company, and pay surrender charges, which may vary from insurer to insurer. It also depends on other factors such as type of policy, premium paid, and the total premium paying term.

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A few policies do come with a surrender value, wherein the policyholder is eligible to receive a prescribed amount.

Here, we take a look at the implications of surrendering a unit-linked insurance plan (Ulip), an endowment plan and a term life insurance plan.

Naval Goel, the founder and chief executive officer of PolicyX.com, said there are two types of surrender values—guaranteed surrender value and special surrender value. “The guaranteed surrender value is calculated as a percentage of the premium paid till the time the policy is surrendered, excluding the first year’s premium and the rider premium if any. Wherein the special surrender value is calculated on the sum assured, accrued bonuses if any, policy term and the total premiums paid so far,” he said.

Implication on Ulips

In the case of Ulips, there is a lock-in period of 5 years, if a Ulip is surrendered in the first three years, the insurance cover would cease immediately. However, the surrender value is paid by the insurer only after the lock-in period gets over.

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“If an Ulip surrender request is made during the first five years from the policy commencement date, the fund value is paid upon completion of five years and then the policy benefits cease. As per regulations, Ulip policies are locked in for five years. A nominal charge is deducted as per regulations. In case of surrendering the policy post five years from the commencement date, the fund value, as available on the date of request, is payable and the policy benefits cease,” said Suresh Agarwal, chief distribution officer, Kotak Mahindra Life Insurance.

Implication on endowment plans

Generally, endowment plans come with a lock-in period of three years, where, if the policy is surrendered before the completion of the prerequisite lock-in period, the entire paid amount gets devalued, leaving zero refund for the policyholder.

Implication on term insurance

In the case of term insurance, where you had opted for an annual premium payment option, there is no surrender value payable and thus the policy gets terminated, that is, the life cover ceases. However, in the case of limited payment term insurance policies, a certain proportion of premiums paid are refunded.

“If the policyholder has paid their premiums in advance, then s/he is eligible to get the fixed amount at the time of surrender. For instance, if the amount to be paid in the next 50 years is paid within 3-5 years, then the policyholder gets the paid amount refunded,” Goel explained.

Thus, you must not surrender your term insurance policy as not only the cover ceases but also a new cover might cost you comparatively more, due to higher age. Moreover, the underwriting benefits may also be lost in case of ceasing of the policy.

What you should do

“The surrender feature is provided in the policy only for situations of extreme liquidity crunch. It is against the interests of customers to surrender life insurance policies; hence customers are advised to continue their policies for the contracted term so that the intended financial goals of the policy are achieved,” said Agarwal.

Do you have a personal finance query? Send in your queries at [email protected] and get them answered by industry experts.

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