Termination of Coverage

The immediate effect of surrendering a life insurance policy is the cessation of the insurance coverage. This means that the policyholder and their beneficiaries lose the protection offered by the policy, including any death benefits that would have been payable in the event of the policyholder's untimely demise.

Receipt of Surrender Value

In exchange for giving up the policy, the policyholder receives a sum of money from the insurance company. This amount is known as the surrender value. It's important to note that the surrender value is typically less than the total premiums paid or the sum assured of the policy. The exact amount depends on several factors, including the type of policy, the duration for which premiums have been paid, and the terms and conditions of the policy.

Separation Strategy

The rationale behind this strategy is straightforward yet compelling. Endowment policies, which combine insurance and investment, often offer lower returns compared to standalone investment vehicles due to their inherent structure and associated costs. Moreover, they generally provide less flexibility and transparency in investment choices.

Financial advisors and studies increasingly suggest that individuals can optimise their financial portfolios by segregating these two components. This approach allows for a more tailored and effective financial plan, where insurance provides the necessary protection and investments are selected based on the individual’s risk tolerance, financial goals, and market opportunities.

Term Insurance Advantages

When it comes to pure protection, term insurance stands out. Unlike endowment policies, term insurance is straightforward – it offers significant cover for a relatively low premium with no investment component. This simplicity means policyholders are not only clear about what they are paying for but also get better value for their money in terms of the coverage amount. In the unfortunate event of the policyholder's demise, the beneficiaries receive a substantial sum, which can be crucial for their financial stability.

In essence, the decision to surrender an endowment policy should be based on a thorough analysis of how well it aligns with one’s current financial objectives. For many, the separation of insurance and investment, the clear benefits of term insurance, and the potentially higher returns from other investment vehicles present a compelling case for reconsideration of their endowment policies.

Dissatisfaction with Policy Features

Over time, your policy might not meet your expectations in terms of coverage, benefits, or flexibility. If this is the case, surrendering and opting for a policy that better suits your needs could be a wise decision.

Change in Financial Circumstances

Life's unpredictability can lead to dramatic changes in financial situations. In cases of severe cash crunches or unexpected expenses like medical bills, surrendering your policy could provide the necessary funds. However, it's vital to balance the immediate financial relief against the long-term benefits you might be losing.

Policy Maturity is Far Off

If your policy's maturity date is far in the future and you have immediate financial needs or find a more beneficial investment opportunity, surrendering might be viable. However, consider the surrender charges and the long-term value you might be forfeiting.

Under Single Premium Plans

These plans, where the entire premium is paid upfront in one lump sum, generally allow for the policy to be surrendered starting from the second policy year. It's a common policy stipulation that surrender is not permitted in the first year.

This restriction is in place to discourage premature termination of the policy and to allow a reasonable time for the policy's investment component, if applicable, to accumulate value. Few Single pay policies do allow the surrender from the first year itself.

Under Limited Premium and Regular Premium Plans

In these more traditional forms of life insurance policies, where premiums are paid periodically over a term, the eligibility to surrender the policy is often linked to the policy's duration.

For Example: Say, for policies with a term of 10 years or less, the policy can usually be surrendered after it has been in force for a minimum of two years, meaning surrender is possible from the third policy year onwards. For policies with longer terms exceeding 10 years, the minimum duration before surrender is typically extended to three years, allowing surrender from the fourth year onward.

These stipulations are designed to balance the policyholder's need for flexibility with the insurance provider's need to manage risk and ensure policy viability. The minimum period before a policy can be surrendered reflects a commitment period during which the policy is expected to remain active to uphold the life insurance contract's integrity and its intended purpose of providing long-term financial security.

When opting for policy surrender, policyholders receive the surrender value, which is calculated based on the higher of the Guaranteed Surrender Value (GSV) or the Special Surrender Value (SSV). Our calculator primarily utilizes the Special Surrender Value (SSV) with the formula:

SSV = [{(Number of premiums paid/Number of premiums payable) * Sum Assured} + Accrued bonus] * Surrender Value Factor (SVF).

The Surrender Value Factor (SVF) is determined by the insurance company, varying with the policy year of surrender. Generally, the later the policy is surrendered, the higher the GSV Factor becomes.

In essence, surrendering a life insurance policy is a significant financial decision, involving relinquishing coverage for an immediate payout. The surrender value is pivotal, representing the financial benefit obtained upon surrendering the policy. Use our calculator to assess this crucial aspect of your financial planning.

The Surrender Discharge Form

This is the primary document required for surrendering a life insurance policy. The Surrender Discharge Form, or Form 5074, is an official document provided by the insurance company. It needs to be duly filled out and signed by the policyholder, indicating their intent to surrender the policy.

NEFT Mandate Form

To enable the transfer of the surrender value directly to the policyholder's bank account, an NEFT (National Electronic Funds Transfer) Mandate Form is required. This form authorises the insurance company to deposit the surrender value into the policyholder's bank account.

Identification Documents

A copy of the policyholder's PAN Card and Aadhaar Card (or other officially recognised identification documents) are required for identity verification purposes.

Original Policy Document

The policyholder must submit the original life insurance policy document. This is a critical requirement, as it serves as proof of the insurance contract that is being surrendered.

Cancelled Cheque

A cancelled cheque is required to provide the insurance company with the policyholder's bank account details. This ensures that the surrender value is credited to the correct account.

Postal Stamp of ₹1

A nominal postal stamp of ₹1 is required as part of the documentation process.

Reasons for Surrendering the Policy

While not always mandatory, some insurance companies may require a written statement or reason for surrendering the policy. This helps them understand the policyholder's motivation and can be useful for their records.

Submission to the Relevant Branch

It is important to submit these documents to the actual branch where the policy was issued, as mentioned in the original LIC policy document. This ensures that the surrender process is handled efficiently and by the correct office.

Policy Start Year

Enter the year when your policy commenced. This is the year you first took out the policy.

Policy Term

Enter the total duration of your policy in years. This is the length of time for which the policy is active.

Premium Payment Type

Select your premium payment type: Regular Pay, Single Pay or Limited Pay. If you opt for Limited Pay, please specify the premium payment term in years, which is usually shorter than the overall policy term.

Last Premium Payment

Choose the year in which you last paid your premium. This helps in calculating the amount you've already contributed towards the policy.

Sum Assured

Enter the total amount assured by your policy in lakhs. This is the amount your policy guarantees to pay upon maturity or in case of an eventuality.

Annual Premium

Input the total amount you pay each year for your insurance policy

Accrued Bonus

If applicable, input the bonus amount in Rupees that has been added to your policy till date.

Surrender Value

This is the estimated amount you would receive if you decide to surrender your policy now.

Sum Assured

Reconfirms the total cover amount that your policy assures.

Premium Paid Till Date

Shows the total amount of premiums you have paid up to the current date.

Premium Payable

Indicates the remaining premium amount that is yet to be paid.

Review Policy Document

Before using the Surrender Value Calculator, review your latest policy statement for the most up-to-date information. This ensures the data you input reflects the current status of your policy.

Understand Policy Terms

Familiarise yourself with key terms related to your policy, such as 'Sum Assured', 'Premium Payment Term', and 'Accrued Bonus'. Understanding these terms will help you input the correct information in the Surrender Value Calculator.

Consider Policy Changes

If you have made any changes to your policy, such as increasing the sum assured or changing the premium payment frequency, make sure these are reflected in the information you put in the Surrender Value Calculator.

Check for Accrued Bonuses

If your policy includes bonuses or additional riders, ensure these are accounted for in the Surrender Value Calculator, as they can significantly affect the surrender value.

Regular Updates

Use the Surrender Value Calculator regularly, especially after receiving statements from your insurance provider, to keep track of how your surrender value may be changing over time.

Understanding the Change

The Insurance Regulatory and Development Authority of India (IRDAI) has proposed a significant shift in life insurance policies, focusing on increasing the surrender value. This change is pivotal for policyholders who choose to voluntarily terminate their life insurance policy before its maturity or the occurrence of the insured event.

Why This Change?

IRDAI observed that many policyholders were receiving minimal surrender values despite years of premium payments. Some policies were even structured to incur high surrender charges, disproportionately benefiting insurers at the expense of policyholders.

Proposed Benefits for Policyholders

The new proposal aims to significantly increase the surrender value while reducing surrender charges. This ensures that if you decide not to continue your policy until maturity, you receive a larger portion of your paid premiums back.

Example of the Change

Current System: Surrendering a policy with an annual premium of ₹1 lakh in the fourth year might yield a surrender value of ₹70,000, with the insurer keeping ₹2.3 lakh as charges.

Proposed System: Under the new proposal, the same scenario would result in a surrender value of ₹2,50,250, significantly reducing the insurer's retained charges to ₹49,750.