Monday, 4 July 2016

FAQs on Surrendering a Life Insurance Policy


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Insurance is a strategic way to protect ourselves financially against unforeseen events. Modern insurance products are tailored to help an individual to achieve his/her future financial goal along with insurance protection. Usually, we buy life insurance policies for longer periods say 15-20 yrs and there are some probabilities that insured person might be unable to pay the premiums or he/she might feel that current insurance policy does not meet with his/her insurance requirements. In such scenarios, policyholder may think to surrender existing insurance policy and replace it with a new one; that meets with his/her budget and future needs. In this post, we’ll be discussing on pros and cons of surrendering a Life Insurance policy and questions related to it.
FAQs on Insurance Policy Surrender
“It would probably not be a wise decision to surrender a policy after paying premiums for a longer period; because insured person only gets a part of his/her premiums when he/she surrenders,” as per experts’ advice.

FAQs on Insurance Policy Surrender-

Pros of surrendering a Life insurance policy

  • Having excessive insurance cover does not make sense. By doing so, you are putting unnecessary burden on yourself; therefore, if you have more than one insurance policy and you think that you won’t need all of them then you can terminate policies that you think you don’t need.
  • You may also think to cancel an insurance policy if it does not meet with your future goals.

Cons of surrendering a Life insurance policy

One should not terminate his/her insurance contract after paying premiums for a certain period. There are many disadvantages of terminating a life insurance policy such as,
  • Remember you only get saving portion of your policy commonly known as surrender value.
  • You get surrender value after certain deductions such as; surrender charges and excluding first year premiums (in some policies).
  • Remember not all policies offer surrender value. Only policies that have embedded saving components acquire surrender value or cash value.

Definition of surrender value or cash value

It is the amount that policyholder receives from the insurer when he/she voluntarily terminates the policy contract before its maturity. Policies that come with investment components offer surrender value if policyholders reluctant to continue his/her life policy.

Definition of guaranteed surrender value

The minimum amount of cash that a policyholder receives after surrendering a policy is termed as guaranteed surrender value.
It is imposed by law that if premiums have been paid by policyholder for a specified period then there shall be a guaranteed surrender value; if policyholder fails to keep his/her policy contract in force.

Do all life insurance policies acquire surrender value?

No, only policies those have saving components offer cash value. Pure protection insurance products like; term life insurance, do not offer surrender value.

Other options before surrendering a life insurance policy

> Many life insurance policies offer partial withdraws and loan facilities etc. You can use these facilities to fulfill your financial needs without surrendering your policy.

How to calculate surrender value?

> The formula to calculate surrender value depends on your policy scheme. Insurers offer verities of insurance products to fulfill every individual’s insurance needs; therefore, parameters like; type and plan of insurance, age of insurance policy, bonuses (if any), and the length of the policy term are used to calculate surrender value.
Almost all insurers have charts that indicate surrender values respective to time periods; therefore, you should visit your insurer’s website to get the details or call your insurer to get accurate method to calculate surrender value.

Can I get full premiums back?

Yes, as per Indian Insurance Act, policyholder receives 15 days free-look-period to return a policy. After expiration of free-look-period, policyholder has to pay at least one-year premiums to receive cash value.

Can I get surrender value if I have not paid premiums for specified period (say 3 years or 5 years)?

Generally, if insured surrenders his/her policy before the lock-in period then he/she is not liable to get surrender value. However, some policies offer surrender value if insured terminates his/her contract before the expiration of lock-in period; but, insurer pays cash value to the insured person after the lock-in period.
For example, Let’s say after paying premiums for 2 years, John surrendered his policy on 01/01/2016 and his policy’s lock-in period was 5 years. Now his policy supposed to cease on 01/01/2016 but he’ll get his surrender value after lock-in period.
Contact to your insurer to know about it in detail.

How do I surrender a life insurance policy?

  • Visit your insurer's nearest branch and fill out the form to surrender a policy. Attach required documents; if asked in the form.
  • You may visit your insurer’s website because nowadays many insurers offering online services to provide hassle free and convenient services.

Final Words

It would not be a wise decision to surrender a Life insurance policy before maturity; especially if you have other options to tackle with present financial problems such as, partial withdraw and loan facility. Some insurance policies allow you reduce your premium rates, you can ask your insurer whether your policy allows you to do so.
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