When you buy a life insurance policy, you generally expect to keep it in the long run, however, there might be times when you want to discontinue your association with your insurance provider. This is known as relinquishing or surrendering a life insurance policy.
One of the main reasons why people consider surrendering their policy is because it does not provide the desired coverage. There could also be instances when the insured is unable to pay the premium amount. Nevertheless, surrendering a policy that is close to its maturity period can result in the loss of several benefits.
When you surrender a life insurance plan, you are not eligible to receive the policy’s death benefit. However, you will be able to get some returns for the premiums you have paid. This amount is known as surrender value and is usually less than the premiums you have paid. Let us discuss it in detail.
What is a surrender value?
Surrender value in an insurance policy is the amount that the policyholder can receive if they decide to terminate the policy before its maturity. It is also known as the cash value of the policy. It is the amount of money paid to the policyholder at the time of surrendering the policy, minus any applicable surrender charges.
Surrender value is important because it provides the policyholder with the option to access their money in times of financial need. The policyholder can cancel the policy and receive the surrender value in order to meet any financial obligations.
However, it should be noted that surrendering a policy before maturity may lead to a loss of the potential benefits of the policy. This is why policyholders are recommended to consider the long-term benefits of the policy before deciding to surrender the policy.
How is the surrender value calculated?
When a policyholder decides to surrender his/her policy, the insurance company will calculate the surrender value of the policy. The amount paid to the policyholder will depend on the policy term, the premiums paid, and the sum assured. The surrender value is calculated on the basis of the premiums paid by the policyholder.
The insurance company will deduct the policy charges and any outstanding premiums from the premiums paid by the policyholder. The amount thus obtained is the surrender value of the policy. The policyholder can avail of the surrender value anytime during the policy term, provided all the premiums have been paid by the policyholder.
The surrender value of a policy also depends on the type of policy. For traditional life insurance policies, the surrender value is calculated on the basis of the bonuses that are accrued over the policy term. For unit-linked insurance policies, the surrender value is calculated on the basis of the current market value of the units held by the policyholder.
It is important for policyholders to understand the terms and conditions of their policy and the surrender value of the policy before making a decision to surrender the policy. This will help them understand the amount of money they will receive in case they decide to surrender the policy. Furthermore, policyholders should also consider the future implications of surrendering the policy before making a decision.