Should you surrender your Life Insurance Policy?

Surrendering the insurance policy means exiting from the insurance policy before the maturity. It is the voluntary termination of the insurance contract by the policyholder.

While most of us know the risks of being under- insured, being over-insured can be equally damaging.

For eg. an endowment plan taken to fund your child's college expenses will become useless if mutual funds earmarked for the same amass to the required amount. In such a situation, it makes sense to surrender the policy and invest the premium in avenues that give better returns.

Pros & cons of surrendering a policy

The life cover orprotection ends

The tax benefit, if availed of on the premium paid till then, may be reversed if surrendered before premium has been paid for two years and five years for ULIP products after the date of commencement of policy.

On surrendering before the maturity date the cash value that you receive is called the surrender value of a policy.

The surrender value is calculated by the insurance company depending upon 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 accrued.

Policies usually acquire a surrender value after premiums have been paid for three years.

If the policy is in its initial stages (3-4 years old) the surrender value is only about 30% of the premiums paid plus any bonuses that may have accrued till then.

The closer you are to the maturity date of your policy, the higher is the amount you get when you exit.

Towards the end of its term, this can be as high as 80% of the premium.

If any extra premium is paid towards riders such as Accident benefit etc, it is usually excluded.

Things to consider before quitting

Make sure your life doesn't remain uncovered at any point. You must have another policy or funds that will keep you financially secure.

Check whether you have an alternative investment to fulfil the goals that were to be met by this policy.

Find out the type of policy and its maturity date.

Evaluate whether the surrender value, if re-invested, will give sufficient returns.

If financial crunch is the reason to quit, compare the premiums of similar plans.

Chances are that you may find a cheaper policy.

Policies held for several years become rewarding with age as the insurer has already recovered its expenses.

Benefits at maturity are huge.

If near maturity, it doesn't make sense to miss the huge payout you will get at the end of the tenure.

Even if you are half-way to the maturity date,

there are some serious calculations you must do.

If you are planning to surrender and invest the proceeds in another scheme, remember that you'll first have to recover the loss before you start earning any return.

So, surrender only if the new investment opportunity is exciting enough.

Timing is also important.

If it's a market-linked plan, giving up the policy when the markets are at a low point will be foolish.

Now that you know when to surrender a policy and the consequences of surrendering it, what would you do?