Financial circumstances of any family can change overnight, their financial need can change over a period of time, or even the economic condition of the state/country they reside in can change over a fortnight.
This is the time when one must reconsider his or her insurance policies. If there is a better option for the same amount of premium, surrender your life insurance policy or try to exit your older insurance policy and invest in the new one.
Few questions out of loads of questions that an investor should ask himself while buying any insurance or if he has one, he must try to figure out answers for these questions.
Have you ever had a second thought about your life insurance policy?
Do you think it is enough to provide adequate financial coverage for your family?
Do you just invest your money into the premiums to save income tax?
Why and When You should Surrender Your Insurance Policy?
As mentioned above, if the financial needs and condition change over time, you should reconsider your insurance policy, either you can surrender it or make it paid up or let it lapse.
The time is very important as in when you are reconsidering your insurance policy.
- Free Look Period: It is the earliest option to exit life insurance policies which is a regulation offered by IRDAI and are mandated by the insurance company.
It is the period of 15 days after the purchase of the policy to reconsider the policy one more time. For distance marketing mode like online mode, the free look period is for 30 days.If you find that it is not suitable for your need you can surrender it and get your premium back.
The charges which cannot be refunded are the medical test charges which are incurred by the insurance company out of your premium, stamp duty, and other service changes.
- Policy Lapse: Insurance companies as mandated by IRDAI provide options to exit life insurance only after three years of the purchase of the policy.So, in the initial phase but after the free look period if your financial needs change and the existing policy is not as per your need, you can let it lapse by not paying the premiums. But you must keep in mind that you won’t get back any premium amount if you let your insurance policy lapse before completing 3 policy years So, it is wiser to think and proceed with this option as early as possible otherwise, your money would be lost.
After Three Years
- Policy Surrender: If you find your existing policy not relevant to your current financial need and status, you can always surrender your life insurance policy after three years of purchase and before maturity.
The insurance company, in such case, is liable to pay you the reduced sum assured which would be a lump sum amount. This amount is known as surrender value or the cash value of the insurance policy.
- Calculating Surrender value: The surrender value derived by summing up the total paid–up value or the premiums and the bonuses. Then the sum is multiplied by a multiplier which is the surrender value factor.
This surrender value factor remains at 0 till 3 years of the purchase of the policy and thereafter keeps on increasing. It is different for every other insurance company and also depends on various other factors.Surrender value is also calculated in different ways by different companies depending on factors like the time period of the insurance policy, time remaining until maturity, bonus accumulation, and premiums paid.
The surrender value increases as the insurance maturity period come closer as the multiplier also increases. In the early years, the surrender value is almost nil.
- Paid-up Insurance policy: If you don’t want to pay premiums for any of your life insurance policies but you want to run it till maturity, you can make it a paid-up policy. In this procedure, after maturity you get a reduced sum assured which is lesser than the actual sum assured for the life insurance policy at inception.
Once you stop paying the premiums and make it as paid-up insurance, the sum assured is reconsidered and the new reduced sum assured is your paid-up value for your insurance policy.
Paid-up Value = Original sum assured of the policy * (Number of premiums paid till date/total number of premiums of the policy)
The amount you would receive on maturity might include a bonus also and then the total paid-up value would be the summation of paid-up value and bonus.
The choice of surrender life insurance policy is very much analytical. You must consider all the facts before you exit one policy and invest in another. It is always advised to take your investment decision wisely and not in a hurry to save income tax. The ideal way is to cancel the policy is during the free look period.