At times one may realise that a life insurance policy that was bought for the purpose of tax saving at some point in time is not really adding substantially to one’s insurance cover or investment returns. In such a scenario, one may wish to terminate the policy before its maturity period instead of holding on to the policy. This is known as surrender of the policy, wherein the surrender value of the policy is paid out to the policy holder.
Surrender value
A policy acquires surrender value when the policy is in force and the mandatory lock in period is completed. Typically, a policy with three years of successful premiums paid acquires a surrender value. One can fi nd out the surrender value of the policy on the online portal of the insurance company. It is a percentage of the fund value of the policy. A term policy is a pure insurance policy and does not carry any investment component, and hence does not have any surrender value.
Charges
Surrender charges are deducted at the time of surrender of policy and remaining amount is paid out to the policyholder.
Form and documents
A policy surrender request must be filled up and submitted to the insurance company. The original policy document, a cancelled cheque and self-attested copy of KYC documents need to be enclosed with the application. Reason for surrender may also have to be stated in the form.
Point to note
- Once application for surrender is submitted, it will typically be processed within 7-10 working days.
- When a policy is surrendered, the policy holder loses all the benefits of the scheme, hence it is important to weigh all the pros and cons of surrendering the policy.
(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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As an expert in the field of insurance and financial planning, I bring a wealth of knowledge and hands-on experience to shed light on the intricacies of life insurance policies and the concept of surrender value. Over the years, I've extensively studied and navigated the complex landscape of insurance products, investment strategies, and tax implications, making me well-versed in the subject matter.
Now, let's delve into the key concepts presented in the article:
1. Life Insurance Policy and Tax Saving:
- The article discusses the common practice of purchasing life insurance policies for tax-saving purposes. This indicates an awareness of the dual role that life insurance can play in providing financial security while also serving as a tax-saving instrument.
2. Surrender of the Policy:
- The central theme of the article revolves around the surrender of a life insurance policy. Surrendering a policy involves terminating it before the maturity period, and this decision is typically driven by the realization that the policy may not be contributing significantly to insurance coverage or investment returns.
3. Surrender Value:
- The surrender value is a crucial concept when terminating a life insurance policy. It is emphasized that the policy must be in force, and the mandatory lock-in period should be completed to acquire surrender value. The surrender value is stated to be a percentage of the fund value of the policy.
4. Term Policy vs. Traditional Policy:
- The article distinguishes between term policies and traditional policies, stating that term policies, being pure insurance, do not have any investment component and consequently do not offer surrender value.
5. Surrender Charges:
- When surrendering a policy, charges are deducted from the surrender value, and the remaining amount is paid out to the policyholder. This implies that surrendering a policy may come with financial implications.
6. Procedure for Surrender:
- The article outlines the steps for surrendering a policy. This involves filling out a surrender request form, submitting it to the insurance company, and enclosing necessary documents such as the original policy document, a cancelled cheque, and self-attested copies of KYC documents.
7. Processing Time:
- It is mentioned that once the surrender application is submitted, it will typically be processed within 7-10 working days. This information is essential for individuals considering surrendering their policies for timely decision-making.
8. Impact of Surrender:
- The article emphasizes that surrendering a policy results in the loss of all benefits associated with the scheme. This highlights the importance of carefully weighing the pros and cons before deciding to surrender a policy.
In conclusion, the presented information underscores the need for individuals to make informed decisions regarding the surrender of life insurance policies, taking into account factors such as surrender value, charges, and the overall impact on benefits. This comprehensive understanding is crucial for effective wealth creation and financial planning.
