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How to Surrender Term Insurance when I have No Liabilities

Insurance companies offer a pure-risk policy called term insurance. It covers the life of the policyholder for a specific period. Say if one wants to get a cover for five years or eight years and in case the policyholder dies within the time covered by his or her term insurance policy, death benefits will be paid by the insurance company to his/her nominee.

Term insurance plans provide various benefits. It gives life cover and along with it can also cover critical illnesses, entire or partial disability and provides tax benefits.

Should I Surrender My Term Insurance Policy?

There could be times in life when one feels that they have no liabilities left, no one to take care of or no loans to repay or are not suffering from any health scare that would require insurance cover. At such times the premium being paid out to insurance companies can feel like an unnecessary burden upon him/her.

One might want to surrender term insurance if he/she doesn’t have any such liabilities left. This situation is the most common amongst retired people who live off the pension. Except for a few who have some life-threatening illness to take care of, term insurance plans seem to be a vain investment.

The loss of prime earner of the family, however, could wreak havoc on the dependents. In the case where one has a lot of dependents or one is the sole earner in the family/ In these cases, it is not advised to surrender one's term insurance policy.

About Surrender Value

To exit from the policy before maturity is possible. A surrender charge could be leviable on the policyholder depending on the plan. However, no charges are levied on surrendering the term insurance plan after five years. Surrender value is inclusive when you decide to surrender your term insurance. Renouncing a policy before the completion of its term makes you eligible of getting a portion of the money back as premium (after deduction of charges). This is called its surrender value, and the insurer qualifies for it.

Term insurance policies that have savings or investment component in addition to insurance are only eligible for a surrender value. Pure term plans (insurance only) cannot acquire any surrender value. Other schemes such as ULIPs do gain a surrender value.

Another notifiable thing is that if you stop paying premiums altogether because you have decided to surrender the term insurance plan, it will not accrue any surrender value. Say, if premium paying term is less than ten years, you should have paid premium regularly for two years, and if the period is more than ten years, then there should be a consistent payment of the premium for three years. If not, there is no payment of surrender value to the insured.

Another arrangement can be of converting the plan into paid-up policy. After payment of the complete premium amount, the insured person is free of any payment obligations. In such a case, the insurance policy remains intact until the insured’s death or voluntary termination of the policy. In such a case, the policy covers continue until it reaches maturity. This arrangement is possible after a minimum period of three years with regular premium payment.

Money-Back in Traditional Plans

Guaranteed Surrender Value

Depending on the time of surrender of your policy plan, the insurer guarantees you a fixed % of premiums paid.

  1. Surrendering the policy after two or three years of inception of the policy plan, thirty percent (30%) of ensured premiums are payable.
  2. Surrendering of the policy plan between four and seven years of commencement of the policy, fifty percent (50%) of ensured premiums are payable.
  3. Relinquishing in the last two years of the policy term, you will get a payment of ninety percent (90%) of premiums.

Special Surrender Value

This value is dependent on the sum assured, policy term, the premium paid and bonuses.

Special Surrender Value = (Paid up value + Bonus) X Surrender Value Factor*

*Surrender Value Factor is the percentage of the paid up value + the bonus.

As per a recent directive of the Insurance and Regulatory Development Authority of India (IRDAI), life insurance companies cannot levy surrender charges in case the policyholder chooses to surrender the policy after five years of commencement of the policy.

Reasons to Stick to Your Term Insurance Plan

Takes care of Your Family after You are Gone

A term insurance plan ensures that your family/ your nominees do not struggle financially in any way if anything happens to you. Those premiums are paid to ensure the survival of your dependents without having to look up to others for funds. When looking into a plan and making an estimate of the amount that would go to the nominee, make sure that the amount is fifteen to twenty times more than your annual income.

Asset Protection

House loans or car loans or any asset covering loan could become an unbearable burden if you leave its repayment upon some dependent member of your family. Someone unable to make payments for the loan taken for necessary assets could be relieved of this burden if you have your term insurance plan in place. Say you took a home loan but due to some untoward situation, you are not there anymore to repay that loan. Your family could become homeless. The future of your children could be in jeopardy, to prevent such a situation, term insurance plans act as a life savior to your family.

Covers Health/ Lifestyle Risks

Due to our sedentary lifestyle, we have become our enemies. We have no idea of the ailments that could threaten our lives and at what time is absolutely out of our hands. Various plans are available to cover all such health risks. A wise thing to do is to choose the right plan that includes health and lifestyle risks. Losing life due to the shortage of money when there was a chance of preventing it from becoming such a threat can be averted by choosing our term insurance plans wisely. To stick to the policy is even more crucial. One never knows which ailment could come knocking at the door.

General Sense of Security

To live life in fear is as good as not to live at all. If you are going to spend your supposedly carefree years worrying about things such as who will take care of my family when I’m gone or what will happen to my children if I’m unable to repay that house loan, it just isn’t worth it.

If any of these questions could become a headache for you after you surrender your policy, you know what the best course of things was in the first place.

Conclusion

The idea behind getting insured is to provide security to the dependents. One's life is precious, and if something were to happen to the person with a lot of dependents like spouse, children or aging parents, one must get his/her life insured. Term insurance, in case of any mishappening, covers all these factors. One may choose to stick to a few, but the option of getting all these risks insured is available.