Have you ever faced a financial crunch and considered your life insurance policy as a potential solution for quick cash? Or perhaps your financial goals have shifted, and the policy that once seemed vital no longer aligns with your needs. Surrendering a life insurance policy in India can be a strategic way to regain financial control, but the process can be complex.
In this blog, we’ll delve into the specifics of surrendering different types of life insurance policies with various premium payment options—regular pay, single pay, and limited pay. We’ll also identify policies that cannot be surrendered and outline the necessary documents for the process. For those seeking personalized financial guidance, finding financial advisors near me or a personal financial advisor near me could be highly beneficial. Join us as we navigate the path to financial flexibility and freedom.
Types of Policies by Premium Payment Options and Their Surrender Processes
1. Regular Pay Policies Regular pay policies, also known as traditional life insurance policies, require the policyholder to make premium payments at regular intervals (monthly, quarterly, or annually) throughout the policy term.
Surrender Value Calculation: The surrender value is typically calculated based on the number of premiums paid and the duration the policy has been in force. It’s important to note that surrendering early may result in a lower surrender value. The Surrender Value Factor (SVF) ranges from 30% to 90% depending on the year the policy is surrendered. For example:
- If the policy is surrendered between the 4th and 7th year, the SVF is around 50%, increasing by 1% or 2% each year.
- In the last four years of the policy nearing maturity, the SVF stabilizes at around 90%.
Processing Time: The insurer will process the request and disburse the surrender value, usually within a few weeks.
2. Single Pay Policies Single pay policies involve a one-time premium payment at the inception of the policy, providing coverage for a specified term.
Higher Surrender Value: The surrender value is often higher compared to regular pay policies since a lump sum was paid initially. The Surrender Value Factor (SVF) ranges from 75% in the second year and increases to 90% after four years.
Streamlined Process: The process is streamlined, and the surrender value is disbursed promptly after the insurer processes the request.
3. Limited Pay Policies Limited pay policies require premium payments for a limited period, while the coverage continues for a longer duration.
Surrender Value Dependency: The surrender value depends on the number of premiums paid and the duration the policy has been in force, similar to regular pay policies. The key difference is that the premium paying term is shorter than the policy term.
Types of Surrender Values
1. Guaranteed Surrender Value (GSV) The Guaranteed Surrender Value (GSV) is a predetermined percentage of the total premiums paid, as outlined in the policy contract. This percentage forms the basis for the calculation of the surrender value.
2. Special Surrender Value (SSV) The Special Surrender Value (SSV) is calculated based on the policy’s sum assured, accrued bonuses, and the insurer’s specific formula. It often results in a higher surrender value compared to the GSV.
You can use our Surrender Value Calculator to determine the surrender value based on the Special Surrender Value, tailored to all premium payment options.
Regulatory Update
The Insurance Regulatory and Development Authority of India (IRDAI) has updated the calculation method for the Special Surrender Value (SSV). Traditionally, the surrender value of a policy is determined as the higher of the Guaranteed Surrender Value (GSV) or the Special Surrender Value (SSV), which are calculated based on premiums paid or the Sum Assured, respectively.
Under the new regulations, the SSV must now be equal to the expected present value of future benefits, the paid-up sum assured on all contingencies, and any accrued or vested benefits, such as survival benefits. This update is expected to result in a slightly higher surrender value for policyholders. Insurers must comply with these changes and update their products by September 30th. The SSV will be reviewed annually, with further clarifications anticipated.
Policies That Cannot Be Surrendered
Not all life insurance policies are eligible for surrender. Policies without a savings component or maturity value typically do not have a surrender value. For instance: 1. Term Insurance Policies Pure-term insurance plans do not have a surrender value as they are designed solely for risk coverage without any savings component. These policies provide a death benefit but no maturity or surrender value.
2. Unit Linked Insurance Plans (ULIPs) While ULIPs can be surrendered, they often come with lock-in periods of around five years. Surrendering them before this period ends can result in penalties, such as discontinuance charges, or no payout until the lock-in period ends, with the amount being transferred to a suspense account.
Understanding these nuances is essential for making informed decisions about your life insurance policies and their potential surrender values.
Documents Required for Surrendering a Policy
When you’re ready to surrender your life insurance policy, ensure you have the following documents:
- Surrender Form: A duly filled and signed surrender request form, available from your insurance company.
- Original Policy Document: The original policy bond issued by the insurance company.
- Photo ID Proof: A government-issued photo ID proof such as an Aadhar card, PAN card, passport, or driver’s license.
- Bank Details: A canceled cheque or a copy of your bank passbook to facilitate the direct transfer of the surrender value.
- Additional Documents: Any other documents specified by your insurer, which may vary depending on the policy type and the insurer’s requirements.
Conclusion
Surrendering a life insurance policy is a significant financial decision that requires careful consideration. It’s crucial to weigh the benefits and drawbacks, understand the surrender value, and ensure it aligns with your long-term financial goals. Consulting with financial advisors near me or a personal financial advisor near me can provide valuable insights tailored to your specific situation.
Please Note: The views expressed in this article/blog are personal and solely those of the author. The intention is to create awareness and not to provide any product recommendations.
