Sunday, 3 July 2016

Pros and Cons of Surrendering a Life Insurance Policy


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Insurance plays a vital role in an individual’s life. It helps an individual to achieve his/her future financial goals and simultaneously it protects his/her loved ones against financial outbreaks upon his/her premature death. Withdrawing an insurance policy before maturity would not be a good decision; however sometimes reluctantly, we need to take such steps under certain circumstances. If you’re going to surrender your policy then in this post we’ve highlighted some pros and cons of surrendering a policy.
Pros and Cons of Policy Surrender

Pros of Policy Surrender-

It is not advised to withdraw a policy before maturity because you only get cash value on surrendering a policy. Insurers invest a part of premiums in saving components and this part called cash value. Actually, insurance companies divide your premiums into two components a) Protection component and b) Cash value component. There are only few reasons to justify policy surrender.

Overinsured: Having excessive insurance cover does not make sense. By doing so, you are putting unnecessary burden on your pocket; 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.
Underinsured: If your existing insurance policy does not meet with your future needs or you think that you’ve inadequate insurance cover then you may think to terminate it; if it (existing policy) does not allow you increase your insurance cover. But remember, new insurance policy’s premiums would be high.
To Meet Future Goals: You may also think to cancel an insurance policy if it does not meet with your future goals. But be aware of losses associated with it such as, surrender charges read here in detail.
Arrange Funds in Emergency: Liquidity is one of the main advantages of a life insurance policy with saving component. One can arrange insist funds to tackle with emergencies such as, medical emergencies.
Get Profits: Usually, insurers share profits with policyholders in the form of dividends or bonuses. Such bonuses paid at the time of maturity or surrender. Only policyholders those are participation in profits schemes like, ‘Par’ receive bonuses.

Cons of Policy surrender-

Premature withdrawal is subject to certain penalties. As mentioned earlier, you only get accumulated cash value on withdrawal. Here are some disadvantages of terminating an insurance contract:

  • After canceling it, all the benefits that you’re receiving from it would suppose to be ceased. In simple words, you will no longer to be covered.
  • In future, if you will buy an insurance policy for yourself then you would have to pay higher premiums for the same benefits; because normally premiums are calculated on the basis of age factor. 
  • 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.
  • You may not be entitled to get cash value if you surrender your policy before specified time or lock-in period (say 3 years or 5 years).
  • You may not be entitled to receive special bonuses if you surrender before the policy term.
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