Have you ever found yourself in a financial bind, staring at your life insurance policy and wondering if it could be your ticket to immediate liquidity? Or perhaps you’ve realized that the policy you once thought essential no longer fits your financial goals.
Like what you're reading?
Get our latest, straight to your inbox.
Surrendering a life insurance policy in India can be a strategic move to regain control over your finances, but the process is not as straightforward as it seems.
In this blog, we’ll explore the nuances of surrendering different types of life insurance policies with varied premium payment options—regular pay, single pay, and limited pay. We’ll also look at policies that cannot be surrendered and outline the documents you need for the process.
Let’s embark on this journey to uncover 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 for which the policy has been in force. It’s important to note that surrendering early may result in a lower surrender value. The Surrender value factors (SVF) range from 30% to 90% depending on the year in which the policy is surrendered. For example, if the policy is surrendered between the 4th and 7th year, the SVF is around 50% and interpolates 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 second year and increases to 90% after four years.
Streamlined Process:
The process is streamlined, and the surrender value is disbursed 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 of the policy, as it applies in regular pay. The only difference is the premium paying term and policy tenure are different here. Generally, the premium paying term is lower than the policy term.
Types of Surrender Values
1. Guaranteed Surrender Value (GSV)
A predetermined percentage of the total premiums paid, as outlined in the policy contract. So, this basis is the calculation of premiums.
2. Special Surrender Value (SSV)
Calculated based on the policy’s sum assured, accrued bonuses and the insurer’s specific formula.
Check out our Surrender value calculator to know the surrender value based on Special surrender value catering to all premium payment options
Regulatory Update
The Insurance Regulatory and Development Authority of India (IRDAI) has updated the calculation of Special Surrender Value (SSV). Traditionally, the surrender value of a policy is determined as the higher of the Guaranteed Surrender Value (GSV) or SSV, calculated based on premiums or Sum Assured, respectively.
Under the new regulations, SSV must be equal to the expected present value of future benefits, the paid-up sum assured on all contingencies, and any accrued or vested benefits like 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, and further clarification is anticipated.
Policies That Cannot Be Surrendered
Not all life insurance policies can be surrendered. Policies without a savings component or maturity value 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 cover without any savings component.
2. Unit Linked Insurance Plans (ULIPs)
While ULIPs are eligible for surrender, they often have 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, as the amount gets transferred to a suspense account.
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 Aadhar card, PAN card, passport, or driver’s license.
Bank Details: A cancelled cheque or a copy of your bank passbook to facilitate 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 should be made with careful consideration. It’s crucial to weigh the benefits and drawbacks, understand the surrender value, and ensure that it aligns with your long-term financial goals. Consulting with a financial advisor can provide valuable insights tailored to your specific situation.
