Want to surrender your life insurance policy?Here's a guide

Meaning of life insurance:

A life insurance policy is a contract between you and the insurance company or provider. The contract envisages payment of settlement amount to your beneficiary in the sad event of your death, against regular payment of premium to the insurance company in terms of the life insurance plans chosen by you. In case you survive the tenure of insurance, you are promised guaranteed benefit on maturity. There are many types of life insurance plans in India, of which the core ones are called term life, whole life anduniversal life. Life insurance plansareoffered by a large number of providers for you to shop for plans that meet your specific needs, relative to your financial goal and budget.

Choose the best life insurance policy with high returns:

Among the wide bouquet of best life insurance policy in India, it is best that you focus on the core life insurance plans explained. You need to learn about the eight basic life insurance types to arrive at an informed decision as to which plan suits you best.

Life insurance plans terms defined:

Before you proceed to opt for a particular plan, you need to analyze the features thoroughly. To do so systematically, you need to be aware of the terminology at play:

• Policy: It is a legal contract between you and the insurer defining the details of the life insurance cover, parties involved, fees, terms and cost.
• Owner: You are the owner as you are entering into the contract with the insurer for receiving coverage.
• Insured: The person who is covered by the life insurance policy.
• Insurer: The Company offering you the policy is the insurer or also referred to as the carrier or provider.
• Beneficiary: The person who has been named by the owner to receive the death benefit. There can be multiple, contingent and even tertiary beneficiaries. The benefit disbursed is tax free.
• Death benefit: It is the lump sum payout by the carrier in favor of the beneficiary on the death of the insured, as per terms of the life insurance planspolicy

Type of Life Insurance Plans:

Now that you are aware of the definitions of the different terms in use, it is important to know of the different types of life insurance policies on offer and the best insurance policy for investment. Typically life insurance policies are broadly classified into two: Term life andWhole life. Each type further has distinctive sub categories. They may be tabulated as:

• Term Life Insurance: It is the simplest form of life insurance plans. The only provision is a payout in case of death during the tenure of thelife insurance plans policy, which can be a maximum of 30 years. The two basic types of online term insurance are:

• Level Term: The death benefit is constant throughout the duration of the life insurance planspolicy.
• Decreasing Term: The death benefit drops annually over the tenure of thelife insurance plans policy.

• Whole Life or Permanent Insurance: The death benefit payout extends to the actual event of your death irrespective of the age of occurrence.

 

• Traditional Whole Life: It provides for death benefit and a savings component. The premium and the death benefit are constant throughout the life of the life insurance planspolicy.
• Universal Life: It offers you the flexibility of enhancing your death benefit subject to a successful medical examination.
• Variable Life: The savings component of this life insurance planspolicy is invested in mutual funds comprising of stocks, bonds and money market instruments to earn higher returns.
• Variable Universal Life: It is a hybrid and a combination of variable and universal policies.
• Equity Indexed Universal Life Insurance:It provides for guaranteed minimum returns, cash value accumulation which is protected from market downturns.

 

• Guaranteed Issue Life Insurance: It is an easy and quick but comes with a limitation of graded death benefit, if the life insurance planspolicy has been in existence for two or more years.

• Accidental Insurance:Death benefit is payable to the beneficiary if the demise is accidental in such life insurance plans.
• Simplified Issue Life Insurance:It is a life insurance planspolicy extended to persons who are not ready for a medical examination.
• Fully Underwritten Life Insurance: This life insurance planspolicy entails medical examination prior to its issue.

Surrender of Life Insurance Plans Policy:

A situation may arise in your life when you are not in a position to pay the premium of your policy or are having second thoughts of opting life insurance plans which you feel is unsuitable and you intend to switch to a different one instead. In either of the cases, the surrender of your life insurance planspolicy will extract cost from you in the form of money paid to the insurer as premium. However, you should be clear in your mind that you can surrender your life insurance planspolicy only after payment of minimum of three premiums else you stand to forfeit the entire sum paid by you. Let us take a look at the procedure and other processes involved in surrendering your policy.

Effect of surrendering Life Insurance Plans Policy:

The effect of surrender of your life insurance policy is dependent on the type of policy you hold. The emerging scenario is:

 

• Term Life Insurance Policy: On stoppage of payment of life insurance plans

premiums your coverage lapses.

• Whole Life Insurance Policy:In these life insurance plansyou have the following choices.

• Cash out the policy: You stop paying premium and collect the admissible cash savings. You cease to enjoy life cover.
• Non-forfeiture: You may opt for a reduced paid-up option with lower death benefit without cash saving. You may also opt for an extended term policy based on the accumulated savings in the life insurance planspolicy.
• Policy lapse: Explore if you can opt for reinstatement of the life insurance planspolicy, which many insurers permit up to five years from the period of lapse. However, a medical examination may be necessary for this option to be invoked.

 

Disadvantages of surrendering your Life Insurance Policy:

By surrendering your policy you are:

• Breaking you contract with the insurer and losing your risk cover.
• You are eligible to receive a payout only after payment of 3 years of premium.
• You are liable to receive only 30% of the premiums paid minus the first premium, if you surrender the policy after 3 years of its life.
• The rate of premium will be higher in future if you chose the same life insurance planspolicy as by then you would have grown older.
• You do not receive any vested bonuses as they are available only after 5 years.

Surrender value of Life Insurance Policy:

When you surrender a life insurance plans policy before the completion of its full term, you are eligible to receive a part of the money paid by you minus the charges and other deductions, subject to extant rules. It is only applicable for policies that have saving component besides insurance. Therefore, while pure term plans are excluded, your traditional endowments, money-back or ULIPs will have a surrender value. There are two types of surrender value:

• Guaranteed surrender value: It depends on when you  surrender your life insurance plans policy:

• After 2/3 years you are paid 30%
• Between 4 and 7 years, you are paid 50%
• In the last two policy years you are paid 90%

 

• Special surrender value: It is calculated by the following formula :

• Special surrender value = (Paid-up value+ Bonus) X Surrender value factor ( it is a percentage of Paid-up value plus bonus)

Paid-up value of Life insurance Policy:

When you stop paying premiums of your life insurance plans policy during its currency, it is automatically converted to a paid-up policy with reduced sum assured and death benefit.

Documents to surrender your Life Insurance Policy: You have to deposit all the relevant documents to your Insurer Branch Office where you hold the policy:

• Original Policy Bond
• Policy surrender form or request for surrender value payment
• Bank account details
• Original valid ID proof

 

On submission of the relevant documents, the proceeds of the surrender value of your policy are transferred to your account within a reasonable time.

Conclusion:

The purpose of insuring yourself through life insurance plans is to obtain risk cover and secure the financial future of your family. By surrendering your policy you are endangering the future security of your family. You receive surrender value if you have continued with the policy for a minimum period of three years. Yet is advisable that you refrain from doing so and if you must, only as a last resort.