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Top 5 Surrender Value Queries And Their Answers

20 June 2022, 5:36 PM

Surrendering a life insurance policy is when you do not wish to continue the life insurance plan and thus terminate the same and withdraw the entire amount invested, is called surrendering of a Life Insurance Policy.

However, most policyholders are not 100% sure of the entire terms and conditions of a policy surrender and all associated questions. 

Top 5 Questions About Surrendering a Life Insurance Policy

1. What is Surrendering of a Life Insurance Policy?

When you surrender a Life Insurance Policy, the contract that had been drawn between the insurer and the insured at the time of the issuance of the policy is terminated. Thus, the surrender value is given to you and the policy is terminated. 

The termination of a life insurance brings an end to the policy. Hence, the death benefit that you were eligible to get while the policy was in the enforced status, would also end. Thus, when you surrender your life insurance policy, you exit from the policy with the cash surrender value that is accrued in your policy. 

Life Insurance Policies like the Endowment Plans and Money Back Plans accrue a cash value on which the surrender value can be calculated. Thus when you surrender a policy the surrender value is handed over to you and the policy comes to an end.

2. Which are the Policies that You can Surrender?

Policy that provide investment benefits along with the insurance plans are eligible for surrender as they accrue a cash value. Such policies are generally Endowment Policies, some Whole Life Policies and Money Back Plans. These policies have a cash value on which surrender charges are levied and then the left-over value of the policy is given back to you when surrendered. Unit Linked Insurance Plans (ULIPS) have a fund value from the investment portion which can be surrendered as well.  

Policies that do not have a maturity benefit have no surrender value as the premium paid in those policies are not used in any sort of investment, neither in the traditional form where bonus is obtained nor in the unit linked form. If such policies like the term plan or any other plan that has only a death benefit is surrendered then the policy itself seizes to be, and you do not get back any amount.

3. When can You Surrender a Policy?

If you hold a policy that is a traditional plan like an endowment plan, a whole life plan or a money back plan or any similar type then you can surrender the policy after payment of three policy premiums. This would be mentioned in your life insurance policy document.

In case you are holding a ULIP policy then you can cease payment after completion of five years and surrender the policy by taking the Fund Value only and forgoing the Death Benefit altogether. 

But in case you would need to surrender the policy before three years since the date of inception then you would get back only about 30% of your premiums paid, post the exclusion of the entire first year’s premium. In case the same needs to be done for ULIP Policies then the loss is even higher, as heavy entry loads are charge upfront at the time of allocation of premium. This makes the loss amount more vulnerable in case the policy is unit linked.

However, it is not advisable to surrender any policy that has not completed five years since investment.

4. What Would be the Surrender Value If a Policy is Terminated Prematurely?

A surrender of a policy is a premature closure of the policy. And its value is the fund or the cash value the policy has accrued minus the surrender charges. These charges are levied by the respective insurer. Further the surrender charge of one policy might differ from the other, so studying the charges schedule before surrendering the policy is necessary. Plus the life coverage which is the primary objective of an insurance policy also ceases permanently.

However, as per the recent guidelines provided by Insurance Regulatory and Development Authority (IRDA) a policy can be terminated by the insured person if he wishes to cease payment after completion of five years, and the Insurer Company is not allowed to levy any charges on the insured person for the same.

Thus the cash value minus the charges stand as the surrender value of a policy.

5. What are the Procedures and the Documents to Surrender a Policy?

The documentation needed is not much. The list of documents are as below:

  1. The original policy documents
  2. Duly filled and signed surrender form
  3. ID proofs with self attestation
  4. Bank details for the transfer of the surrender value

Thus when you need to surrender an ongoing policy then you should intimate the life insurance company first, and then provide them with the above mentioned documents and any other additional documents asked by the respective insurer.  The company would then process the request and would also let you know the turnaround time within which you can expect the surrender value to get credited in your account, as per the details given in the account. The approximate time needed for surrendering a policy is about 7 – 10 days.

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