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    Understanding surrender value and its implications on life insurance policies

    Synopsis

    Policyholders of life insurance policies can opt for surrendering their policy before maturity, which will pay them a surrender value, constituting a part of the sum assured. The guaranteed and special surrender values apply only if all premiums are paid for at least two years. Single premium policies acquire the surrender value immediately, but ULIP plans require five years of lock-in period for payout. Upon surrendering the policy, all associated rights, interests, and benefits, including protection cover, cease to exist. Policyholders should weigh the pros and cons and consider alternative options, such as taking a policy loan before making decisions.

    Understanding surrender value and its implications on life insurance policiesAgencies
    Life insurance policies provide financial security to policyholders and their beneficiaries in the event of unexpected events such as disability, critical illness or death.

    However, there may be times when policyholders may consider surrendering their policy before the maturity period. In such cases, the policyholder can receive a surrender value, which is a portion of the sum assured.

    According to the IRDAI regulations, surrender means complete withdrawal or termination of the policy before its maturity period. The surrender value is an amount that becomes payable to the policyholder in case of surrender, in accordance with the terms and conditions of the policy.

    All individual savings and protection-oriented products, except for pure risk premium products, shall acquire both a guaranteed surrender value and a special surrender value, whichever is higher.

    The guaranteed surrender value is applicable if all premiums have been paid for at least two consecutive years.

    The special surrender value represents the asset share in case of par policies, where the asset share shall be determined in accordance with the guidance or practice standards issued by the Institute of Actuaries of India.
    Single premium policies acquire surrender value immediately on receipt of the single premium.

    However, in case of ULIP plans, the surrender value is paid out after the completion of the lock-in period of 5 years.

    Once the policyholder opts to surrender the policy, all the rights, benefits and interests linked with it, including the protection cover, will cease to exist.

    The surrender value of a policy is based on the portion of premiums that went into the cash value account plus the interest rate paid or investment gains. Outstanding loans are subtracted from this amount, along with any surrender fee.

    It is important to read the terms and conditions of the policy before surrendering it. For instance, term insurance plans do not provide any compensation or surrender value.

    However, for insurance plans like Unit Linked Insurance Plans (ULIP) and Traditional Policy, surrender value will acquire after 2-year premium paid (traditional) and a lock-in period of 5 years for ULIP.

    Surrendering a life insurance policy can have both pros and cons. One of the benefits is that the policyholder can access cash that has accumulated over time, which can be useful in case of emergencies or to pay off debts.

    Additionally, the policyholder no longer has to pay premiums, which can be a financial relief if they are struggling to keep up with payments. They are also no longer obligated to maintain the policy.

    However, there are several disadvantages to surrendering a life insurance policy. First, policyholders will no longer have coverage for their beneficiaries in case of their death.

    Secondly, they lose the investment potential of the policy, as well as any dividends or interest that may have been earned. Moreover, surrendering a policy may result in taxable income, which could impact their overall tax liability.

    Lastly, in most cases, the surrender value payout is likely to be lower than the actual cash value towards the policy.

    Policyholders should carefully consider the pros and cons before deciding to surrender a life insurance policy. In some cases, it may be more beneficial to explore other options, such as taking a loan against the policy.

    It is also important to consult before making such decisions to understand the impact on their overall financial planning.

    (The author of the article is Chief Customer Officer & Head of Digital Business, Bharti AXA Life Insurance)

    (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)



    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

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