You buy a term insurance policy for two reasons: to provide a financial safety net to your family, and the second is to help get access to funds for paying off loans. Thus, the affordability of the term plan makes this policy type the most widely used by individuals.
Can I Surrender My Term Insurance?
As you are aware, term insurance is a pure type insurance contract in which the policyholder should continue to pay the premium for the agreed term and should there be an unfortunate eventuality; the insurer would pay the nominee the amount of sum assured under the policy. Now, suppose you survive the term insurance tenure and no longer have heavy financial obligations. In that case, the fixed premium under the policy could seem a waste, and you probably want to put it in some other savings avenue.
However, there are two possible ways to surrender a term life insurance policy:
- During the free look-in period of 15 days from the issue of policy (30 days for online purchase of the life insurance policy)
- At any other point of time during the tenure of the policy for plans which have a term insurance component
What is the Effect of Surrendering My Policy?
The insurance company will cancel the policy, and your nominees will no longer be eligible to receive any death benefit under the policy. You could receive some paid-up value on the policy according to the specific method of computation of term life policy cancellation proceeds under the policy but remember this amount is taxable*. Any loan against the policy would have to be squared up before the surrender process can happen.
What is the Surrender Value on the Policy?
As mentioned before, term life plans can have surrender value which is the amount that has been allocated from the premium paid. Different insurers have different methods of calculating the surrender value of their policies. In general, you should have paid the premiums for a stipulated number of years before a surrender request can be entertained.
How Do I Cancel My Term Insurance?
In TATA AIA policies, the policyholder can surrender voluntarily and receive the surrender benefit computed according to the policy's terms and options for payouts. A special surrender value computed at a specified percentage of the premium paid is also paid.
What are the Factors I Should Consider Before Surrendering the Life Insurance Policy?
Instead, you should deeply consider the following outcomes before deciding to go ahead.
- You should ensure that there are sufficient funds to meet the financial obligations that might emerge. You could be tempted today if there were a sudden drop in the set of liabilities, but you must be prepared to cover your family if you have to take up a new obligation due to changed circumstances. Continuing with the policy would have then been a good approach.
- If your children start earning, you could feel that your responsibilities would decrease. However, it would not be feasible to overburden your children should tragedy strike. It would be prudent to let the policy run for its tenure.
The decision to surrender an ongoing policy should not be taken hastily.
What are the Alternatives to Surrendering the Term Plan?
Term insurance plan surrender is not an advisable option especially considering that a new policy at an older age would be more expensive, and you would need whole life coverage if you wish for a longer coverage period. Therefore, you should look for alternatives to the surrender option. The two ways you can avoid the unnecessary outcomes of surrendering the plan are given here.
- You can opt for a decreasing term policy that has less premiums and a decreasing coverage as the policy reaches the term. You can have just enough coverage, and your premium, although unchanged, is reasonable. Your family, of course, continues to get protection from any unforeseen eventuality.
- You can opt for a Term Plan with a Return of Premium2. Although the premiums on this policy are more than basic term plans, the survival benefit is paid at the end of the policy's tenure. Thus, the premium paid need not be considered a sunk cost.
Why Should I Avoid Surrendering a Term Insurance Policy?
When you surrender the term plan, there are many risks that your family is exposed to, and these should be mitigated. Unfortunately, an alternative such as a new policy would be very expensive for the extended life period, even for lesser coverage. Here are some reasons why you should not surrender a life insurance policy:
- Protection to the family: Despite the squaring up of liabilities and relatively better financial conditions, an ongoing term life policy should be allowed to continue. If an unfortunate eventuality occurs, the death benefit under the policy would substantially help the family, given that you would be no more around to provide for them further.
- Rise in medical risks: As you grow older, you could be afflicted with some medical conditions. If they are progressive, then the existing policy would pay the death benefit after you pass away at the end of the terminal stage of illness.
- Better coverage for a lesser cost: Considering that the premium on term life policies is fixed, it is a cost-effective way to secure coverage under inflation-adjusted conditions.
- Avoiding debt, especially in rising inflation: If your family had to contend with paying a loan after you leave them without a term insurance policy, the interest burden would be more, especially when inflation is rising. On the other hand, they can pay off the loan in full or partially with the death benefit. Then, the reduced interest outflow can be manageable.
You have taken the right step in getting adequate term life coverage, especially if you are the primary earning member of your family. If you have reached the stage of life where you have higher income, better returns from investments and a good corpus for retirement, you would feel that the term life policy should be surrendered. However, it is not a feasible idea for the reasons discussed above. Therefore, allow the policy to run for its tenure and keep your family protected at all times.