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Surrender Your Insurance Policy (If It's Not Too Late)

It is a well known fact that most people buy life insurance policies (primarily moneyback / endowment plans and sometimes ULIPs) with investment being the sole or main objective. Life cover is considered as an add-on benefit.

It is a lesser known fact that moneyback / endowment plans give terrible returns. ULIPs too can be a bad investment, unless the applicable charges are low.

Therefore, the ideal situation would be to avoid insurance if you are looking for an investment option.

However, if you have already made the mistake of 'investing' in an insurance policy, you must salvage the situation so that the losses are minimized.

Here's a quick checklist of various issues relating to surrender of an insurance policy.

Important point to note: The rules are somewhat different for the traditional plans like endownment / moneyback and the ULIPs.

Hence the two are discussed separately:

A. Endownment / Moneyback Policies

1. When you prematurely close your endowment or moneyback policy, you get back only a part percentage of the total premiums paid and bonuses accrued till date. This, in insurance parlance, is called Surrender Value.

2. The percentage amount returned is low in early years. It progressively increases as the policy comes closer to its maturity date.

3. In fact the Surrender Value is zero, i.e. you get back nothing, if you prematurely close your policy before having paid premiums for first TWO consecutive years (for policies with Premium Paying Term of less than 10 years) or THREE consecutive years (for policies with Premium Paying Term of 10 years or more).

4. There are two types of surrender values : Guaranteed Surrender Value and Special Surrender Value.

5. Guaranteed Surrender Value is
   - 30% of the premiums paid, if the policy is closed after 2/3 years
   - 50% of the premiums paid, if the policy is closed between 4 to 7 years
   - Up to 90% of the premiums paid, if the policy is closed in the last two years

Press STOP if you are in the early years of your insurance policy.

6. Special Surrender Value includes bonuses earned and is calculated as under:
Special surrender value = (Paid-up value + bonus) x Surrender value factor (where Surrender value factor is the specified percentage based on the no. of years the policy has completed.)

7. Rough calculations show that you can recoup the loss on policy surrender if you close the policy in early years. As the policy nears its maturity, it would be best to continue with the same. In the middle years, you can consider the option of making your policy partly paid-up.

8. If you don't want to bear the loss on surrendering and also wish to avoid paying future premiums, you can convert the policy into a partly paid-up policy. This, of course, is possible only after the first 2/3 premiums have been paid.

9. In partly paid-up policies, no further premiums are payable. As only part premiums have been paid, the life cover cannot be the original Sum Assured. The reduced cover, known as Paid-up Value, is calculated as under:
Paid up value = Original sum assured x (No. of premiums paid / Total no. of premiums payable)

10.  This 'reduced' life cover under a partly paid-up plan continues till the maturity date as per the original policy. On maturity you will receive the Paid-up value. But you may not be eligible for any bonuses or additions.

By the way: Term policies are pure insurance covers. They have no investment component. Hence, they have no Surrender Value.

B. Unit Linked Insurance Plans (ULIPs)

1. In case of ULIPs, the Surrender Value is the market value of the fund as on the date of policy closure, provided the policy is surrendered after the initial lock-in period of 5 years.

2. If the premiums are stopped before 5 years are complete, the policy lapses.

3. In case of such lapsed policies, the fund value accumulated till date is moved to what is known as Discontinuance Fund. You will be paid this amount in Discontinuance Fund (after deducting certain charges as specified) only at the end of 5 years.

4. An interest of 3.5% p.a. will be paid on the amount in the Discontinuance Fund, from the date of discontinuance till the date of payment. However, fund management charges of up to a maximum of 0.5% may be levied on the same.

5. Discontinuance charges vary from Rs.6000 if the policy is closed in the 1st year to Rs.2000 if the policy is closed in the 4th year.

These, broadly, are the applicable provisions when you surrender your life insurance policy before maturity or convert it into a partly paid-up plan. You must ask your insurance company to provide you with all the details specific to your policy and study the same, before you decide upon your future course of action — continue, surrender or paid-up.

Very Important: Depending on the facts of the case, you may lose the tax benefits claimed in the earlier years when you surrender your insurance policy. So study the tax provisions carefully.

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