Suppose you take the best term insurance policy in India. It is possibly an affordable and straightforward way to grant financial protection to your loved ones after an unfortunate event. There can be a time when you, as a policyholder, may question whether it is worth continuing. You might come up with a quick solution, such as cancelling or surrendering your term insurance. But read this article before you take that decision to understand the consequences of doing so.
Why Do People Consider Surrendering Their Term Insurance?
The basic three reasons why people consider surrendering their term insurance policy are:
- Financial Strain: An unexpected financial setback or a change in financial situation that makes it hard to continue filling premium payments.
- Misalignment of Policy Features: Life circumstances and insurance needs evolve thus, the current term insurance policy no longer fits current goals or requirements.
- Lack of Awareness of Alternatives: No knowledge of exploring other more beneficial options (like borrowing against the policy) than surrendering it all.
What Happens When You Surrender a Term Insurance Policy?
When you surrender a term insurance policy, you give up all the benefits and associated cover. You lose the death benefit, any accumulated bonuses, and if there is any investment component.
Why are term insurance policies even more costly to surrender? The term insurance policies do not offer a surrender value like endowment or moneyback plans. But some policies usually offer a surrender value under specific conditions:
- Guaranteed Surrender Value (GSV): A portion of the premiums paid defines the minimum sum that the insurer will guarantee upon surrender.
- Special Surrender Value (SSV): Greater than the GSV, SSV may account for paid-up value and accumulated bonuses.
Note: Surrendering a term insurance policy early poses a risk of losing a major portion of the money already invested and forgoing the life cover altogether.
Factors to Consider Before Surrendering
| Factor | Details |
| Lock-in Period | Endowment/Moneyback Plans: 3 years; ULIPs: 5 years. Surrendering before this period results in significant losses. |
| Impact on Future Premiums | Premiums will be higher if you purchase a new policy after surrendering. Age and health conditions could further increase premiums. |
| Losing Accumulated Value | Older policies may have higher surrender values, bonuses, or paid-up value. You will lose them all if the policy is surrendered. |
Alternatives to Surrendering Your Policy
Do not surrender the term insurance policy, especially in the presence of these options, which you can explore.
- Borrow Against Your Policy: You get a loan against some policy’s surrender value. At nominal interest rates, you get to borrow up to 90% of this value and continue to enjoy the benefits of the policy, as well as access the funds you need.
- Reduce Coverage or Premiums: There are instances where you get to reduce your coverage or adjust the premium structure. This is a more affordable alternative according to your current financial situation and is much better than surrendering.
- Consult Your Insurer: Discuss your situation with your insurer, and they can offer flexible options to retain the policy. Such offers are usually more affordable than surrendering.
Cost Analysis of Surrendering Term Insurance
Look at an example to understand the effect on your finances:
Term Plan Purchased at Age 30:
- Life Cover: ₹1 Crore
- Annual Premium: ₹5,000
- Tenure: 30 years
Term Plan Purchased at Age 40:
- Life Cover: ₹1 Crore
- Annual Premium: ₹6,500
- Tenure: 30 years
The individual surrendered his policy at 30 and purchased a new one at 40. He had to face higher premiums due to age and potential health risks. Therefore, more expense for the same ₹1 Crore coverage.
Note: If you develop any medical conditions after surrendering your policy, insurers may raise your premiums/exclude coverage for certain conditions.
When Does Surrendering Make Sense?
There are certain situations when surrendering a policy is fine, such as:
- The policy no longer aligns with your financial goals or life stage.
- The surrender value is higher than the total premiums paid
- You do not need the coverage.
- There are alternative investments or financial planning strategies that are more suitable for your current situation.
Note: Weigh the long-term impact before making a decision.
Tools for Decision-Making
These online tools help you make an informed decision.
- Surrender Value Calculator: This online tool gives an estimate of your policy’s value upon surrender, based on premium amount, policy duration, and the number of premiums paid.
- Premium Calculator: A Term Life Insurance Premium Calculator is an online tool that compares premiums across different term insurance plans. You get an idea of the amount you must pay in the future to get similar coverage.
Is It Worth Surrendering?
So, suppose you have invested in the best term insurance policy in India, and you decide to surrender it. This is a significant decision that you should not take without knowing the consequences. Understandably, you might get immediate relief, but remember, it is at the cost of losing valuable life coverage and collected benefits. Afterwards, when you get a new policy, it can become more expensive and difficult to get in some cases.
Therefore, look into all the factors before taking this decision to surrender your policy. It is good to consult your insurance to get an idea of other flexible solutions. Make the decision that offers financial security and preserves your long-term goals.
FAQs on Term Insurance
1. Which is better, paid up or surrender value?
Paid-up value is better if you want to maintain coverage without paying premiums. Surrender value gives a lump sum but may be lower in the beginning.
2. Why is the surrender value less than the premium?
The surrender value is less than the premium because it excludes a few things. The first year’s premium, additional rider premiums, and any potential bonuses/maturity benefits are excluded.
3. How do I withdraw my term insurance?
You can use the online portal. Many companies offering the best term insurance policy in India provide easy options on their websites to cancel or surrender policies. You can do it yourself or contact an expert.
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