What happens when you surrender policy?

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Rahul has lost his job and is not able to pay the premium of life insurance policy. It was 20 year endowment plan. According to Rs 50,000 per annum, he has deposited Rs 1.5 lakh in three years. But now Rahul is not in a position to pay the premium and wants to get rid of the policy.

But he does not know what will happen if the insurance is discontinued before maturity. Let’s try to understand this.

Under the rules of insurance regulator IRD, Rahul can surrender this insurance. Any life insurance policy’s premature closure is treated as surrender.

On surrendering the policy, the policyholder gets a part of the premium paid, which is called the surrender value. In premature closure of the insurance policy, the policyholder has to bear the loss. Companies give two options for surrendering the policy.

First is Guaranteed Surrender Value in which the policyholder can surrender his policy only after completion of 3 years. No money will be received for surrendering the policy before that in the second way, the policyholder gets a Special Surrender Value. This is decided on the basis of Basic Sum Assured, Total Bonus and Surrender Value. There is a possibility of getting more money back than the Guaranteed Surrender Value because bonus can also be received

If the policy has to be surrendered, then the companies want policyholders to return the insurance only after spending three years. This is because in life insurance policy, for the first three years, the commission of the agent and the incentive and bonus of the development officer etc, costs more.

Rahul’s insurance has been running for three years now if he returns it, then the surrender value will be calculated only on the basis of two years’ premium. Premiums paid in the first year and premiums for the death benefit over the policy term are deducted.

For the subsequent two years, 30% of the premium and bonus earned during this period is returned as surrender value. Because of this Rahul will get only Rs 45,000 as surrender value. Surrender value also increases as the term of the policy increases. Insurance companies have different rules on how much amount will be received on surrender of the policy.

Personal finance expert Jitendra Solanki says, that the surrender process in ULIP is a bit easier. Here, the surrender value is decided on the basis of the fund value till that date. Although in ULIP you cannot withdraw your investment before five years.

In this case, your policy is closed but its amount goes to the Discontinuance Fund 4% interest will be given annually on this amount. After five years from the date of commencement of the policy you will get your money back.

The number of policy surrenders in the country is increasing rapidly. According to IRDA report, 2.3 crore life insurance policies were surrendered before maturity in the year 2021-22. This figure is three times more than the policies surrendered in 2020-21. The number of policies surrendered in the year 2020-21 was 69.78 lakhs. During this period, the number of surrender insurance policies of 16 out of 24 life insurance companies increased in the year 2021-22 as compared to the previous year. Of these, maximum 2.12 crore policies were surrendered to the government insurance company LIC.

There is a provision to surrender the policy under IRDA guidelines, but its process is very complicated. If you ask your insurance agent, he will not be ready to surrender the policy in any case. If you go to the office of the insurance company, then you will be pressurized to continue the policy by all means.

Surrendering the policy is even more difficult in LIC. If the policy is discontinued, the company faces financial loss and also its track record gets affected negatively. In such a situation, no company wants that any of its policy should be closed.

CFP Jitendra Solanki says that life insurance is for a long period of up to 20 years. Due to rising inflation and job cuts, the number of policy surrenders is increasing.

On surrendering the policy, the investor has to bear a huge loss. To avoid this, measures should be found. If there are only 2-4 years left for the policy to mature, then one should try to continue it. If the policy is not good for investment or you don’t have money to pay the premium,  then you can surrender it.

Money9 suggests that. Insurance companies give the option to surrender the policy before maturity. But use this option only when necessary because surrender value is always a loss deal.