A life insurance term plan is sought for its enhanced features available for a reasonable premium. Moreover, it provides a better sum assured for your loved ones in case of your unexpected demise. But people consider surrendering their insurance plans for several reasons, personal or otherwise. However, surrendering a term life insurance policy in the final phase, does have a lot of repercussions. Therefore, you must understand them before you decide. Here is a detail to help you out.
What Is Meant By Surrendering Your Term Policy?
Surrendering your term life insurance plan refers to terminating your policy and also the relationship with your insurer. It is a mere cancellation of the benefits that accrue from your insurance plan during the policy term. However, insurance providers consider the stressful conditions that urge a policyholder to surrender and provide a certain remuneration referred to as the surrender value.
What Is the Surrender Value?
Surrender value is the amount your insurance provider will pay you when you apply for surrendering the policy. It is based on the premium amounts paid less the surrender charges mentioned by the insurer. Every insurer has a specific method of computing the surrender value.
Why Is Surrendering Your Insurance in the Final Phase a Bad Idea?
Though terminating the term policy provides a surrender value, it is not a good idea to do it in the final phase. Here are a few reasons to attribute this fact.
- Loss of investment value - When you invest in a term life insurance policy, the real purpose is the sum assured to your family in the event of your unexpected demise. When you start investing early and choose a longer policy term, the death benefit is extremely apt for an affordable premium.
However, when you decide on a term policy cancellation, you get a surrender value that may not be profitable. You will not receive a complete refund of the premium amount paid. Also, only a few types of term plans provide the surrender value. And, the surrender value will be based on a factor that is unique to every insurer. It will be a mere loss of your investment value in the long term.
It is also important to mention that term life insurance plans do not have a better surrender value than insurance products that provide savings and investment benefits. Therefore, before deciding, you must compute the surrender value with the help of a customer service executive from your insurance provider and understand if a real benefit exists for the investment you have made.
- Loss of rider# benefits - When you save in a term life insurance plan, you get the option to invest in add-on riders#. The rider# options enhance the financial assistance provided to you as part of the policy benefits.
For instance, the critical illness makes the insured amount payable for all your medical expenses when diagnosed with a critical illness. So, when you surrender the policy thinking it is no longer necessary, you are missing out on a huge lump sum benefit for your hospitalisation and other treatment charges when you get diagnosed with a critical illness at a later stage in your life.
- Lengthy and cumbersome processes - When you decide to surrender a term life insurance policy, the process involved in submitting the necessary documents and going through the termination procedure is difficult.
Why Do People Surrender Term Life Insurance?
We have seen some disadvantages of surrendering the term insurance plan at the final phase. However, people tend to do so due to several reasons. Let us understand them and decide what we can do to avoid them:
- There might be a scenario wherein your nominee no longer wants the lump sum death benefit because they are well settled and secure. In such cases, you can still hold onto the policy and let your nominee benefit by investing for their future generations.
- You are no longer financially stable to pay the premium. Such scenarios come up after your retirement when you are short of income. In such cases, you can request your nominee (if he is your child who is settled with a job) to pay the premium and take the death benefit in your absence.
Term life insurance plans in India are regarded as one of the apt options to secure your family in the event of your unexpected death. It provides a range of benefits based on the policy features, death benefit and premium. However, you might decide to surrender your policy and receive the surrender value due to certain compelling situations.
Nevertheless, surrendering your term life insurance plan is regarded as a risky idea at the final phase considering the loss of the investment value, rider# benefits and the lengthy, cumbersome processes. Therefore, it is advised that you think several times before deciding to surrender your term plan in the final phase.