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Want to surrender your life insurance policy? Here's a guide

If you are confused about what will happen on surrendering your life insurance policy, here's everything you need to know about life insurance closure.

  • 26,969 Views | Updated on: Jun 07, 2024

With more people becoming mindful of the upsides of term insurance plans, everybody hopes to get their hands on the most ideal scheme they can on the off chance that their loved ones might need financial help after they pass away. However, there might be circumstances wherein dropping a term insurance plan is the most appropriate choice. We’ll direct you through a point-by-point outline of this other side of term insurance plans, which is known as surrendering your policy.

Surrendering life insurance means cancelling or opting out of your coverage. Determined by the type of insurance you possess and whether it includes a cash value or an investing component, the surrender will entail:

  • informing your provider
  • filing a surrender form
  • having your insurance terminated

Insurance Termination and Surrender Value Meaning

You must be wanting to learn more about what is surrender value in insurance. Simply defined, it is the aggregate value a policyholder will get from their insurance carrier if they choose to close or terminate their policy before it matures. It also depends on whether your chosen insurance plan has a surrender value feature.

Co-Relation Between Life Insurance and Surrender Value

Life insurance surrender value may consist of nothing but a simple termination or a lump sum payout, depending on the type of insurance you have.

  • Term Life Plan
  • There is no investment component to term life insurance plans. The provider will simply terminate your term life policy, and you won’t get a payout.

  • Universal Life Plan
  • The policy surrender value here is a cash value component. Whenever you terminate these policies, you will get the amount of your investment portfolio unless there are cancellation costs charged by the insurance provider.

  • Whole Life Plan
  • Once you terminate whole life insurance, you receive your entire original investment as surrender value in insurance, excluding any costs. Approximately one-third of your premiums are invested in this portfolio over the course of your policy’s term. When you surrender your policy, the insurance company can charge up to 30% as termination costs.

The Unexpected Policy Surrender

If you fail to pay the premiums required to keep your policy active, the insurance company will offer you a certain amount of time to reinstate the coverage. If the payment is not made, there will be an automatic foreclosure of the life insurance policy as per the insurance terms and conditions.

Things to Keep in Mind Before Deciding to Surrender The Policy

  • Bid Adieu to Tax Benefits
  • Tax benefits from insurance policies are one of the most simple and durable ways to cut costs on taxes. Interest paid for life insurance plans is excluded from taxation under Section 80C of the Income Tax Act. However, if you surrender your policy, you will not be able to avail these tax benefits.

  • You Might Have to Pay the Policy Surrender Fee
  • If you choose to cancel your term insurance before it matures, your insurance provider will assess the appropriate costs against the paid-up policy value, taking away from the overall surrender value.

  • New Policy Added Expense
  • Policy premiums are calculated depending on the policyholder age. As a result, if you decide to cancel one insurance and replace it with another in the future, then you will have to pay greater interest than you do now.

To summarise, every policy can be surrendered at your discretion, but you must keep in mind that after surrendering your policy, you and your loved ones are no longer protected. Without any financial security, it can become challenging for you to deal with the uncertainties of life! Therefore, while deciding to surrender your policy, weigh the consequences because more often than not you might end up losing more than gaining!

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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