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Planning to surrender your life insurance? Know the costs first

Surrendering a life insurance policy entails terminating the contract before its maturity date and cashing in the accumulated cash value. While this may seem like an attractive option in times of financial strain or changing circumstances, it is essential to weigh the consequences carefully.

Surrendering a policy typically incurs penalties and may result in significant loss of accumulated value. For instance, if a traditional policy is surrendered in the first year, the policyholder gets back nothing. If the policy is surrendered in the second year, only 30% of the premium paid is returned to the policyholder. The policyholder gets back 50% of the premium paid from the fourth year to the seventh year. From the end of the ninth policy year, the policyholder gets back 90% of the annualised premium paid.

Additionally, surrendering the policy means forfeiting the death benefit. In December last year, the insurance regulator came out with a draft exposure in which it had proposed to increase the surrender value of all non-linked life insurance policies if a policyholder surrenders the policy before the maturity period. It had proposed a premium threshold (the limit is yet to be defined) to calculate the surrender value instead of basing it on the percentage of the overall accumulated premiums. The final guidelines are yet to come.

Factors to consider before surrendering

Before making the decision to surrender your life insurance policy, consider the following factors:

Assess your current financial situation and explore alternative solutions before surrendering the policy. Depending on your circumstances, options such as policy loans or partial withdrawals may provide the necessary funds without compromising the policy’s integrity.

Adhil Shetty, CEO, Bankbazaar.com, says, “The policyholder must evaluate the long-term impact of surrendering the policy on his financial goals and objectives. He must consider whether the surrender value adequately compensates for the loss of coverage and potential future needs. The policyholder must be mindful of the tax implications associated with surrendering a life insurance policy. Depending on the policy type and duration, surrendering the policy may trigger taxable income or capital gains.”

Life insurance plays a pivotal role in securing the financial future of your loved ones. In the event of your demise, the death benefit provided by the policy can replace lost income, cover mortgage payments, fund your children’s education, and meet other essential expenses. This financial cushion provides invaluable peace of mind, allowing your family to grieve without the added burden of financial instability. Moreover, life insurance can serve as a powerful estate planning tool, facilitating the smooth transfer of assets to the next generation while minimising tax liabilities.

So, while surrendering a life insurance policy may offer short-term relief, it is essential to approach the decision thoughtfully and consider its long-term ramifications. Remember, life insurance isn’t just a policy; it’s a promise to protect your loved ones’ future.

Source : Financial Express