A life insurance policy is a long-term financial contract that can provide security and financial protection for your family in the event of your death. It is an important part of financial planning for many people. However, sometimes life insurance policies may no longer be necessary or needed. In such cases, one may need to surrender their life insurance policy in India.
Surrendering a life insurance policy is a process of canceling the policy before the maturity date. In such a case, the policyholder receives a lump-sum payment from the insurer known as the surrender value. The surrender value is the amount that the insurer pays for the policyholder to surrender the policy and is based on certain factors of the policy.
When to surrender a life insurance policy?
There are several reasons why someone might choose to surrender a life insurance policy in India. These include:
When the policyholder’s financial goals have changed: If the policyholder’s financial goals have changed and the life insurance policy is no longer relevant or necessary, then it makes sense to surrender the policy.
When the policyholder cannot afford the premiums: If the policyholder is unable to pay the premiums or has difficulty meeting the financial responsibilities associated with the policy, then surrendering the policy may be the best choice.
When the policyholder has a better option: If the policyholder has found a better option such as a lower-cost policy or a different type of insurance product, then surrendering the policy may be a good alternative.
When the policyholder does not have a beneficiary: If the policyholder does not have a beneficiary for the policy, then it may be best to surrender the policy.
When the policyholder has a cash emergency: If the policyholder needs money quickly to cover a medical bill or other emergencies, then the policyholder may choose to give up an insurance policy.
Steps to surrender a life insurance policy
Surrendering a life insurance policy in India is a relatively simple process. Here are the steps you need to take to surrender a life insurance policy in India:
Step 1: Contact the insurance company: The first step is to contact the insurance company and inform them that you would like to surrender the policy.
Step 2: Submit the surrender form: The insurance company will provide you with a surrender form which you need to fill out and submit. This form will include details such as: policy number, name and address of the policyholder and the beneficiary, date of surrender, and the reason for surrendering the policy.
Step 3: Pay any outstanding premiums: If there are any outstanding premiums, then these must be paid before the surrender value can be released.
Step 4: Receive the surrender value: The insurance company will then calculate the surrender value of the policy based on the cash surrender value and any applicable surrender charges.
What are the tax implications of surrendering a life insurance policy?
Surrendering a life insurance policy in India is treated as a sale of the policy and is subject to taxation. The amount of tax payable will depend on the type of policy and the duration of the policy.
For policies that have been held for more than 12 months, the surrender value is subject to long-term capital gains tax. Alternatively, for the policies that have been held for less than 12 months, the surrender value is subject to short-term capital gains tax. The rate of tax is the same as the marginal tax rate of the policyholder.
It is important to understand the pros and cons of surrendering a life insurance policy before making the decision. By following the steps outlined above, the policyholder can easily surrender their life insurance policy in India.