You buy a term insurance policy when you have specific responsibilities like providing for your family or paying off a home loan. And leaving behind a lump sum amount is an excellent way to secure your family financially without burdening them. But what should you do with an insurance policy when you have zero liabilities? A surrender term life insurance 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?
You must make every effort to pay your premiums on time when you buy a term insurance policy. Your insurance will be automatically canceled or forfeited if you miss a payment. You won’t have any immediate financial consequences, but you’ll lose the life insurance your policy offers. You risk leaving your family without any financial support if you don’t have this important insurance.
If you do decide to surrender term life insurance policy, you’ll probably pay far more money to buy new coverage later. Keep in mind that your premiums will depend on your age and health. Today’s term insurance policies also typically include a maturity reward, like a refund of premiums. The maturity benefit will be forfeited if you relinquish your insurance.
Although giving up your coverage can seem like a smart move at the time, doing so could hurt your finances in the long run. Some people worry that their term insurance will expire. You shouldn’t worry, though. Before the maturity date, you can always change your term insurance plan into a standard life insurance policy.
Paying hefty premiums may seem like a waste if you have no liabilities. The money paid towards premiums can be used for a better cause. But the policy cannot be surrendered if you have a pure-term insurance plan. Insurance policies with an investment or savings component are the only type of term plans which can surrender. So, if you are sure there is no requirement for 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 dependent’s 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. If an unfortunate event occurs, they will need your life cover to cover their living costs. Ensure that 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 top breadwinner’s income. The payouts cover the needs of their financial dependents in a contingency. Consider if your nominee has gained enough economic independence to avoid financial crunches without your life cover’s monetary benefits.
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 term insurance 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 term insurance surrender value.
Example for Surrender Value
Consider paying Rs. 15,000 each year for an amount assured of Rs. 3 lakh throughout the course of a 20-year policy. After the fourth year, you ceased making premium payments. If the bonus is Rs. 30,000 and the value factor is 30% in this instance, the paid-up value will be equivalent to Rs. 60,000, and the special surrender value will be equal to (60,000+30,000) x (30/100), which is Rs. 27,000.
However, Kotak Life limited-pay and single-pay e-term plans accrue term insurance 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 maturity if you wish to. However, in return for exiting the policy, you get some money, which is the policy’s surrender value. As previously mentioned, term plans need investment or savings components like Unit-Linked Insurance Plans (ULIP) have a term insurance surrender value.
Every company has a set period after which you can surrender the plan, which you cannot do immediately after buying the plan. The set period also depends on your policy term and the 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 of a loan against the policy.
How to Surrender Term Insurance
You must start the process of surrender term insurance policy through your insurance service provider. Following that, the insurer will determine the surrender value that will be paid to you. The surrender value of the policy will be less than the premiums you have already paid. Can a term life insurance policy be surrendered? You can, indeed! But as a result, the policy’s value will inevitably fall.
The cash term insurance surrender value refers to the amount that the insurance provider gives you once you return the policy. If the covered event occurs prior to the policy’s maturity and the insurance coverage is terminated voluntarily, this clause applies. A guaranteed surrender value, which is the sum that is guaranteed to the policyholder in the event that the policy is canceled voluntarily before maturity, is offered with a number of products. But there is a fee for giving up before maturity.
The surrender value for the policy is set by the Insurance Regulatory and Development Authority of India (IRDAI) during the first seven years. The surrender value is determined by the insurance company starting in the seventh year but only after consultation with the policy regulator.
The surrender value decreases by up to 50% between the fourth and seventh years; starting in the third year, the surrender policy is up to 30% of the paid premium. The general rule is that the amount you receive on the closure will be bigger the closer you are to your date of maturity at the time of your leave.
To find out the precise surrender value of your term insurance policy, it is essential to contact the insurance provider.
Reasons to Avoid Surrendering Term Insurance
1. Securing Your Family
Your family may be financially stable at the moment and 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 your spouse’s and children’s future, 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 without a connection to heredity or lifestyle. In addition, 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 if you were to take a loan due to an emergency but could not pay it ultimately. Then, 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 premiums for coverage you do not need. Yet, your loved ones remain secure 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, the need for life insurance might resurface. So 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 life needs a cover to protect your family’s finances - Even if you have no current liabilities, new financial obligations may arise. 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 must continue paying the premiums to avail yourself of 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. Regardless of actual expenses incurred, the lump-sum payouts from the riders 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.
