Life insurance is a long term contract as it is the branch of insurance in which the payouts or in other words the insured peril is generally triggered on the death of the policyholder or on certain unfortunate happenings like disability.
Other forms of Life insurance products like pension products and other investment products are also long term in nature. The policyholder needs to continue the policy for periods which may be as high as 25 years or may be more than that.
The life insurance policy is renewed every year for which the insured needs to pay the stipulated premium before the due date or any grace period provided by the insurer. If the premiums are not paid on time the policy will lapse and the benefits under the policy will be forfeited.
This long term commitment of paying premiums for such a long period of time is an inherent nature of many life insurance products. The life insurance policy is just like a tree which you plant when it is small and water it every day by paying premiums on time to reap the fruits by protecting and securing your family once any unfortunate incident happens to your life.
Life is not certain, the income and expenses of an individual also varies drastically over a period of time. There are years when we have spare cash in hand which we spend on holidays and leisure stuff but again there are some years in which we have some major expenses and face a cash crunch.
Paying life insurance premium in these tight years is a challenge for many. But as mentioned above as well, once premium payment is stopped the benefits and the protection umbrella of insurance in no longer cushioning us. Also the premiums paid on the policy in earlier years are at stake.
There could also be cases where the insured after purchasing the life insurance policy feels the product is not fit for his requirements or I has been wrongly sold to him as the benefits promised by the intermediary is actually not applicable.
In both cases discussed above the policyholder will think of aborting the policy but get something in return as he had paid the premiums in earlier years after purchasing the insurance from his hard earned money. Here the term surrender value comes into picture.
In case the insured decides to abort or abandon the life insurance policy before maturity due to any reason say because of his inability to pay further premiums due to a money problem or he is actually not satisfied with the benefits offered under the product, he is entitled to get the surrender value as per the policy terms and conditions.
The terms surrender value is self-explanatory, it is the value policyholder gets once he surrenders the policy mid-term. The insurance company may deduct a surrender charge for aborting the policy in middle but as per the new directives of the regulator IRDAI, if the insured runs the policy for initial five years and then decide to abort the same no surrender charges can be deducted by the insurer and the policyholder will get fund value of his investment. There are two types of surrender value which we discuss in the next section, this will clarity in the mind of the reader about the money he is eligible in cases of policy abandonment.
Guaranteed surrender value is mentioned in the sales brochure in the form of a table and give you a clear idea what amount will be getting in surrender cases. It is payable after completion of a specified period and is generally 25% – 35% of the premiums paid till date under the policy. This does not considers any additional premium paid for riders and bonuses or other rewards the insured may have got by continuing the policy till maturity. Special surrender value is calculated using a formula using surrender value factor. This will be better understood by taking an example. Suppose Ram has purchased an endowment product for which he pays 50k premium for sum insured 10 Lakh, the policy terms is 25 years. Now if the stops paying after 7 years due to any reason and the bonus accumulated till this time is 15k and surrender value factor in 7th year is 35%. Special surrender value will be (50/100)*(1000000*(7/25) + 15000) = 147500.
In the above example we can clearly see that in both the forms of surrender the policyholder not only loses the benefits under the policy but also is unable to recover the premium paid by him over the period. The money which he is getting by mid-term surrender of his life insurance policy is a small fraction of the premium paid by him over the years and interest accumulated on the same.
He can generate much better and risk free returns by simply depositing the money in a bank fixed deposit over the same period. Surrendering an insurance policy is not at all advisable in any cases except situation of extreme urgency and in cases where the insured thinks he should pull out whatever money he is getting from the insurance policy which is not at all as per his requirements and invest the same money somewhere else to generate good returns that what he would have got in the life insurance product.
It is always suggested to continue to policy till maturity to reap rich dividends.