Did you know the average penetration and density of Life Insurance in India is only around 2.76%? Yet, life insurance is essential for families to feel secure and provide a sense of stability to continue their lives without losing financial stability after losing their loved ones. In this blog, we will understand what is surrendering your life insurance policy.
What is Surrendering Your Life Insurance Policy?
In simple terms, surrendering a life insurance policy is to cancel your policy. Surrender value is the actual amount of money you get if you opt to cancel your life insurance policy ahead of its maturity.
2021-22 saw a surge in insurance policies being surrendered before their maturity, which was more than 2.3 crores due to the Covid 19 Pandemic, the number was more than three times the number of policies surrendered in 2020-21 (69.78 lakh).
Types of Surrender Values:
It is imperative to read your policy documents to know about the types of surrender values; they are:
1. Guaranteed Surrender Value
If you have paid the insurance premium continuously for the initial three years, you are eligible to receive the surrender value, equivalent to the amount of premium you have paid until the date. However, the surrender value does not include bonuses and the first premium you have paid for additional benefits.
2. Special Surrender Value
This value is calculated when you stop paying the premium, but the policy remains active at a lower sum assured, known as paid-up value. The surrender value is calculated as the sum of the paid-up value and the total bonuses multiplied by the surrender value factor. For instance, you paid a premium of Rs. 15,000 annually for a sum assured of Rs. 3 lakhs for an insurance policy of 20 years. But you stopped paying the premium from the fourth year; suppose the bonus here is Rs. 30,000, and the value factor is 30%. The paid-up value would be equivalent to Rs. 60,000, and the special surrender value will be calculated as follows:
(60000+30000) x (30/100)= 27,000
Where,
Paid up value = 60,000
Bonus= 30,000
Value Factor- 30%
Reasons to Surrender Your Life Insurance Policy:
- You found a better deal
- You urgently need a large amount of cash
- You can’t afford the premium
- You no longer need a life insurance policy
Conclusion:
Once you surrender your life insurance policy, your risk cover benefit will end. You will partially lose the sum of the amount you have invested and will lose on the tax benefits a life insurance policy provides. You should surrender your policy only if there is a valid reason.