All you need to know about Surrendering Term Insurance Policy
A term insurance policy is usually taken to provide financial security to your family to handle life responsibilities in case anything untoward happens to you during the policy term. But it is possible sometimes that your judgment in choosing a plan might go wrong, leading you to surrender your term life insurance policy. It is also possible that the purpose or goal of availing of the term insurance is accomplished, making you think of surrendering the term plan.
Ashwin Kumar is working as a senior manager in a public sector bank. He just turned 30 but has three insurance policies under his name: one term insurance plan and two endowment plans, mainly because of his insurance agent friends. He bought these policies to help them reach sales targets but realized that a significant portion of his earnings is being spent on paying premiums. Moreover, the fact that he is still single and doesn’t have a family of his own also adds to his desperate need to close the policies that don’t serve any purpose.
Ashwin has therefore decided to retain one term insurance policy and surrender the endowment plans. Being a banker, he calculated the surrender value and approached the insurance company to initiate the surrender process. Since the policies were taken two years ago, the surrender value was very low, but Ashwin was prepared to accept the losses since it was his mistake to buy so many policies without any need. Now, having surrendered all the unnecessary insurance policies, Ashwin’s savings have increased considerably. He is left with one term plan, which he intends to continue for the entire policy term.
What is ‘Surrender Value’?
Surrender means discontinuing an existing insurance policy before its maturity date and letting go of the promised benefits provided by the plan voluntarily. Although it is advisable to continue with a term plan to reap its full benefits, there are situations where there is no other choice left. Here is the top thing that you need to think about before surrendering the policy:
Things to ensure before surrendering your term insurance policy
Policy Type: Before approaching your insurance provider on how to surrender a term insurance policy, you must understand the type of insurance you are holding. First, get to know whether it is a pure term plan or return of premium term plan or whole life term plan, etc. Only then will you understand the implications of surrendering the policy, such as surrender value, penalty charges, maturity/survival benefits, etc.
Surrender Value: The value to be paid by the insurance provider to the policyholder when a policy is surrendered, based on the total premiums paid until the time of surrender. It has to be noted that you should have held the policy for a certain period for it to accumulate surrender value.
For example, suppose a policy is being held for two years or more. In that case, the surrender value for that policy is generally obtained if the premium amount is being paid regularly for at least three consecutive years.
The term life insurance surrender value can be classified into Guaranteed Surrender Value and Special Surrender Value.
Guaranteed Surrender Value: The value to be paid by the insurance provider on surrender is fixed in advance. It is the percentage of the total premiums paid till the surrender date, excluding the 1st first-year premium. Sometimes, it is also calculated as the percentage of the vested bonus in addition to the total premiums paid. The guaranteed surrender value is fixed by the insurer beforehand and is mentioned in the policy document.
If the policy is surrendered in the 2nd or 3rd year of inception, the guaranteed surrender value will be 30% of the total premiums paid. If the policy is surrendered between the 4th and 7th year of the policy, the surrender value shall increase up to 50% of premiums paid. The surrender value could be 90% of the total premiums paid if the surrender happens during the last two years of the policy.
Special surrender value: It is calculated by the insurance provider using the formula Accrued bonuses + Paid-up value) multiplied by the surrender value factor. The special surrender value is generally higher than the guaranteed surrender value, as a lot of other factors are taken into account while determining the special value. But fixing the special surrender value is entirely dependent on the insurance company, and there is no guarantee that all plans will carry this value.
Calculating the surrender value for a term insurance policy might look complex for individuals, but the insurer makes some calculators on their website for each calculation. By entering the details of your policy, premium, and policy term in these calculators, you can quickly get to know the exact surrender value within minutes, thus saving you time.
Alternate source for life protection: The primary purpose of buying a term plan is the life cover. By choosing to surrender the term plan, do you have an alternate source of life protection available? This is the question that you need to think about. Have you chosen a better plan with added benefits, or does the need for term insurance no more exists? These thoughts should be answered before deciding to relinquish the term plan altogether.
The surrender process doesn’t usually take time, but surrendering a term insurance plan during your middle age without any backup is not advisable. This is because a term policy might not directly benefit the policyholder. Still, his/her family members shall greatly benefit from the proceeds of the policy in case of the insured person’s demise. The benefit amount shall help them pay off any outstanding dues or loans and continue with their lives without any financial worries, even if you may not be around them. Therefore, it is advisable not to surrender a term insurance policy unless there is a dire need due to unavoidable situations.