How to Surrender Term Life Insurance When you have No Liabilities

• 20th Jan 2020
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You buy a term insurance policy when you have certain responsibilities like providing for your family or paying off a home loan. And leaving behind a lump sum amount is a good way to secure your family financially without burdening them. But what should you do with an insurance policy when you have zero liabilities? Surrendering your policy is the most reasonable option. Read further to know if surrendering your term policy is the best option and if not, then why you should stick to it.

Should You Surrender Term Insurance Policy?

If you have no liabilities then paying hefty premiums may seem like a waste. The money paid towards premiums can be used for a better cause. But if you have a pure term insurance plan then the policy cannot be surrendered. Insurance policies with an investment or savings component are the only type of term plans which can be surrendered. So, if you are sure that there is no requirement of a death benefit then surrendering the policy should be the way to go.

Things to ensure before you stop your term insurance policy

• Sufficient assets to meet your financial dependents needs in your absence - You may not have any outstanding debts. But your family members may still look to you for their financial well being. They will need your life cover amount to take care of their living costs if an unfortunate event occurs. Ensure if your other life insurance and investment returns will be enough to meet such expenses if you surrender your term plan.
• Family members ability to sustain their living without your financial support - Term plan replaces the principal breadwinners income. The payouts cover their financial dependents needs in a contingency. Consider if your nominee has gained enough economic independence to avoid financial crunches without your life cover’s monetary benefit.

What is ‘Surrender Value’?

Surrender Value is the money you receive on voluntary exit from your life insurance plan before the maturity date. Insurers pay the sum from the earnings on your premium portions allocated towards savings. Policies acquire surrender value after you pay the premiums for some time.
Term plans are pure protection plans without any savings component. Hence, regular term insurance policies usually have no surrender value.
However, Kotak Life limited-pay and single-pay e-term plans accrue surrender value after you pay the premium for a specified period. The amounts you get on surrendering such policies depend upon the premium paid and the remaining policy term. Surrender charges apply.

Surrender Value of Your Term Plan

When you buy life insurance you can exit the policy before the maturity period if you wish to. In return for exiting the policy, you get some amount of money which is the policy’s surrender value. Like previously mentioned, term plans need to have an investment or savings components like Unit-Linked Insurance Plan (ULIP) have a surrender value.

Every company has a set period after which you can surrender the plan and cannot be done immediately after buying the plan. The set period also depends on your policy term and the number of years you have completed after buying the policy. The amount received after surrendering the insurance plan attracts income tax and other charges if you have availed a loan against the policy.

Reasons to Avoid Surrendering Term Insurance

1. Securing Your Family

Your family may be financially stable at the moment, capable of looking after themselves but tomorrow’s situation is still unknown. A financial need could arise at any time leading your family to become dependent to make ends meet. To secure the future for your spouse and children, receiving a death benefit would help them stabilize their financial condition.

2. Safeguarding Against Health Risks

There is always a chance of getting a critical illness which has no connection to heredity or lifestyle.Treatments for many critical illnesses can cost a lot which doesn’t go easy on any family. Choosing the right plan would aid in paying off the medical expenses and getting you the right therapy.

3. Paying Off Loans

You may not have any loans to your name but your spouse or children could end up taking one. The sum assured would make it easy for them to pay it off without burning their savings. This could also hold true if you were to take a loan due to an emergency but were unable to pay it completely. Your family would have to bear the financial burden of paying it off.

Alternatives to surrendering term insurance

• Decreasing term insurance plan
  In this plan, the life cover amount decreases as the policy term expiry date draws near. The premiums for such policies are usually lower than regular term plans. Thus, you need not bear the burden of excess premium for coverage you do not need. Yet, your loved ones remain secured against financial hardships in case of an eventuality.
• Term Plan with Return of Premium
  It refunds the total premium you pay throughout the policy term when the plan tenure ends. Thus, the plan shields your family against life’s uncertainties. It also provides a survival benefit by returning your invested sum. Hence, your premium spends are fruitful.

FAQs

1. Should I surrender my term insurance policy?
If you have no unpaid loans or financial dependents, you may not want to continue paying your term insurance premiums. But in future, needs for life insurance might resurface. If you want to keep your loved ones’ financial future secure for the long term, term insurance is essential.

2. Reasons to stick to your term insurance plan

• Future needs for life cover to protect your family’s finances - Even if you have no current liabilities, new financial obligations may arise in the future. But at an advanced age, due to age-related health complications, getting a new term plan can be challenging. Also, term insurance premiums increase with age. Hence, it might be cost-effective to stick to your existing term plan.
• Tax benefits - Your term plan premiums are eligible for tax benefits under Section 80C of the Income Tax Act, 1961. But you need to continue paying the premiums to avail the tax deductions.
• Protection from health hazards - Term plans offer optional riders. These provide extra payouts for life-threatening ailments or permanent disability. Such health conditions often need long-term and expensive treatments affecting your savings. The lump-sum payouts from the riders, paid regardless of actual expenses incurred, can fund the treatment costs. Surrendering your term plan will terminate such benefits.
• Legacy for your heirs - Even if your loved ones do not need financial help, you can use your term insurance for estate planning. Some of your legal heirs can receive the benefits of your other assets. Some others can benefit from your term plan payouts.

- A Consumer Education Initiative series by Kotak Life