Planning to surrender your life insurance? Know the costs first

financialexpress.com:

Surrendering a life insurance policy entails terminating the contract before its maturity date and cashing in the accumulated cash value. While this may seem like an attractive option in times of financial strain or changing circumstances, it is essential to weigh the consequences carefully.

Surrendering a policy typically incurs penalties and may result in significant loss of accumulated value. For instance, if a traditional policy is surrendered in the first year, the policyholder gets back nothing. If the policy is surrendered in the second year, only 30% of the premium paid is returned to the policyholder. The policyholder gets back 50% of the premium paid from the fourth year to the seventh year. From the end of the ninth policy year, the policyholder gets back 90% of the annualised premium paid.

Additionally, surrendering the policy means forfeiting the death benefit. In December last year, the insurance regulator came out with a draft exposure in which it had proposed to increase the surrender value of all non-linked life insurance policies if a policyholder surrenders the policy before the maturity period. It had proposed a premium threshold (the limit is yet to be defined) to calculate the surrender value instead of basing it on the percentage of the overall accumulated premiums. The final guidelines are yet to come.

Before making the decision to surrender your life insurance policy, consider the following factors:

Assess your current financial situation and explore alternative solutions before surrendering the policy. Depending on your circumstances, options such as policy loans or partial withdrawals may provide the necessary funds without compromising the policy’s integrity.

Adhil Shetty, CEO, Bankbazaar.com,