Life Insurance Policy Surrender Rules You Should Be Aware of

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Do you want to cancel your life insurance policy? Do you have any questions pertaining to policy surrender? Do you know the advantages and disadvantages of surrendering a policy? Are you unable to decide whether you should cancel policy or not? Today I will walk you through some questions including policy surrender rules whose answer a policyholder seek before he actually makes a decision. It might be not a wise decision for you.

Insurance is an ideal way to protect yourself financially against unanticipated events. Modern insurance products are designed to help you achieve your future financial goal along with insurance protection.

Generally, we buy life insurance policy for a long period say 15-20 years and sometimes more. But there are some possibilities that the insured may be unable to pay the premiums during this period or he may feel that current insurance policy does not meet his insurance requirements.

In such situations, policyholder may consider insurance policy surrender option or converting it to a new policy that meets his budget and future needs.

Policy Surrender Rules

According to life policy surrender rules, after the lock-in period policyholder may cancel his policy, can increase or decrease his premiums, or even can opt insurance policy portability option.

It is often seen that most of the policyholders cancel their policies without knowing the alternatives and policy surrender rules.

Before closing your policy, you should know policy surrender terms and conditions, and terminology associated to it.

If you're about to surrender insurance policy then this post will surely open your eyes and will help you know better options.

Decision of surrendering policy after paying the premiums for a long period of time is not considered good because insured gets a very small portion of his investment in the form of surrender value.

Below I am highlighting policy surrender rules and frequently asked questions and answers you should be aware of before you make this important decision.

Policy Surrender Frequently Asked Questions and Answers including Insurance Policy Surrender Rules

Advantages of surrendering a life insurance policy

  • Being over-insured is not beneficial at all, you put unnecessary burden on your pocket. So if you have more than one insurance policies and you know only one is sufficient then why should you pay extra premiums? Instead you should invest your hard earned money in other investment options such as mutual funds.
  • If your policy does not meet your future needs, then you can think of surrendering insurance policy or converting it to another insurance plan (as per the policy surrender rules, policyholders can switch (in case of convertible policy) to another policy without closing existing one).
  • If you've become a victim of policy misselling, then, for your knowledge, you have a 15-day cooling-off period in which you can cancel your policy and get full refund. According to Insurance Act, if a policyholder cancels his policy during cooling-off period, insurer has to refund premium paid.

Disadvantage of cashing-out life insurance policy

  • One should not terminate his insurance contract after paying the premiums for a certain period because you only get a very small portion of your investment in the form of surrender value.
  • Surrender value is subject to surrender charges. Insurer pays after deducting surrender charges.
  • Remember that not all life insurance policies come with surrender value. Policies with savings components come with surrender value or cash value.
  • The method of arriving at surrender value is not clear, it varies policy to policy. Values are calculated arbitrarily, in most the cases.

For detailed information on advantages and disadvantages read this post.

What is surrender value or cash value?

Surrender Value is the actual cash amount policyholder receives upon cancelling his insurance contract before the chosen policy tenure comes to an end. Surrender Value is a percentage of paid-up value.

Surrender Value or often called Cash Surrender Value is the amount a policyholder receives from the insurer when he voluntarily cancels his life insurance contract before maturity. When the policyholder is reluctant to continue his policy, he surrenders his policy as per the policy surrender rules.

If his policy comes with investment components, he gets some money in the form of surrender value or cash surrender value.

What is guaranteed surrender value?

According to Insurance Act, if premiums have been paid for at least 3 consecutive years there will be a guaranteed surrender value.

The minimum amount that a policyholder will certainly receive after surrendering the policy is called Guaranteed Surrender Value.

In a policy, that comes with investment components, when a person pays his premiums for a certain period of time or till the lock-in period and then discontinue his policy, he gets amount accumulated in his insurance investment portfolio in the form of guaranteed surrender value.

Guaranteed Surrender Value is nothing just assured amount that policyholder will receive if he opts for a premature closure of his policy.

Do all life insurance policies come with surrender value?

No, only policies with investment options have surrender value. Pure life insurance products such as term life insurance do not provide surrender value.

Policy surrender alternatives

Many life insurance policies provide partial withdrawal, paid up policy, loan facilities, portability and the like options.

Policyholders are advised to consider these policy surrender alternatives too; which are in my opinion, better than policy withdrawal.

I just have published a dedicated post on policy surrender alternatives, I firmly advise you read that post before you actually terminate your contract.

How to calculate policy surrender value?

As mentioned earlier, the method of arriving at surrender value is not clear because all policies offer different benefits. There is not a fix formula to calculate surrender value of a policy.

Here is an example of surrender value formula (as mentioned before it varies from policy to policy):

Surrender Value= (Total Premium Paid - First Year Premium) × Surrender Value Percentage/100 
         = ($80000 - $20000) × 30/100
         = ($60000) × 30/100
         = $18000
Guaranteed Surrender Value ₹18000.
Total premium paid= $80000
First year premium= $20000
Surrender value percentage= 30

Insurers provide variety of insurance products to meet individual's insurance needs. Hence parameters such as type of insurance, paid up additions, advance premium payments or gaps in premiums, dividend accumulations, policy loans, age of insurance policy, bonus (if any), policy term and the like are used to calculate the surrender value.

Life insurers provide a chart in policy documents that lists surrender value of a policy at different times including surrender value formula to calculate current cash surrender value of your policy.

Therefore, visit your insurer's website to get the details or call your insurer to get the exact method to calculate surrender value. Same can also be obtained from the Policy Surrender Rules section of your policy documents.

You can also take help of your insurance agent because it's his duty to help you till the policy is in force.

Can I get my insurance premium back?

Yes, according to the law, policyholder gets a free-look-period often called cooling-off period of 15 days. During this period, insured can read his policy documents and understand his insurance contract terms and conditions.

If he finds policy is not meeting his insurance needs or he has become victim of policy misselling, he can refuse to accept his insurance contract and ask for full refund of premium paid.

After the cooling-off period, policyholder will be required to pay his premiums till the lock-in period to get policy withdrawal benefits.

Can I get surrender value if I have not paid the premiums till the lock-in period?

No, if insured surrenders his policy before the lock-in period, he is not eligible to receive policy surrender value.

However, some policies offer surrender value if the insured terminates his contract before the expiration of the lock-in period.

But, the cash value will be given to the insured after the lock-in period. For example suppose that after paying the premiums for 2 years, John surrenders his policy on 01/01/2020 and his policy has a lock-in period of 5 years. Now his policy will be cancelled on 01/01/2020. But the lock-in period is 5 years. So according to his life insurance policy surrender rules (only if insurer allows), John will get the surrender value after 5 years (on 01/01/2024).

It should be noticed that only rare policies offer surrender value if policyholder terminates his contract before the lock-in period.

Most insurance companies do not offer cash surrender value till the lock-in period. Contact your insurer for more information and read your policy surrender rules.

How can I surrender a life insurance policy?

Go to the nearest branch of your insurer and fill policy withdrawal form. Attach necessary documents; If asked in the form.

You can also visit your insurer's website because nowadays many insurance companies provide online facilities from buying policy to submitting claim request. On your insurer website, you can also find policy surrender section.

In my recent post, I have showed you a step-by-step guide on 'how to surrender a life insurance policy?' You should read that post.

Read the policy surrender rules carefully before surrendering your policy.

Will TDS be charged?

Yes Tax Deduction at Sources (TDS) will need to be paid on any amount you receive, whether partial withdrawal or policy surrender or even on maturity benefits.

When will the policy be cancelled?

If you surrender your policy then your policy will be closed after the settlement. Or if you do not pay the premium of your policy, then your policy will be lapsed after the 30 days grace period.

Can the policy be surrendered once it is lapsed?

No. Once the policy is lapsed, it needs to be revived by paying full premiums including policy revival charges. And only then you will be able to surrender your policy.

Insurance companies give a grace period, which is usually 30 days, to every customer. If customer does not pay the premium even after the grace period then insurer will be forced to close your policy.

But even after the policy is closed, the insurance company allows the customer to revive it by paying the premium with late fees and policy revival charges.

Last words

Surrendering a life insurance policy before maturity is not considered a good decision; especially if you have options such as partial withdrawal, loan, paid-up policy, and convert policy to meet your financial needs.

Some insurance policies allow you reduce your premiums. You can ask your insurer if your policy allows you to do so.

If you have any question regarding policy surrender rules then feel free to ask in the comment box, I will be glad to help you.