What is the first thought that came to your mind when you decided to buy a 20-Year life insurance policy this year? Was it just to save tax during the financial year? Or was it because some bank executive persuaded you to buy it when a simple and way cheaper, term plan would have met your requirements better?
These are two of the most common reasons why people end up buying insurance policies which they don’t need. So while there is nothing wrong in discontinuing such policies, it is important to know the correct way to handle such situations.
Whether to Surrender or Not?
Before you decide to surrender, it’s worthwhile to see what surrender value can you get. Surrender Value is the amount you get if your policy is terminated before the maturity period. Your decision should also consider the period for which you have already paid the premiums:
- Premiums paid for less than 3 years – In this case you don’t have much of an option and it’s better to surrender.
- Premiums paid for more than 3 years but still a long way to go for policy to mature – The best thing you can do is to make your policy paid up (discussed later) or take the surrender value.
- Premiums paid for almost the full maturity period – It’s already too late. Do not surrender and let the policy run its full tenure.
What if I surrender my policy?
Now if you eventually decide that you will surrender your policy, it’s worthwhile to remember the following important points:
- As a policy holder, you must submit a filled up and signed surrender request form, providing all the relevant details like policy number, name, contact details, etc. Along with the form, you also need to provide the original policy document, bank account details, a cancelled cheque of the account where the amount is be transferred and self-attested KYC records.
- The insurance agency will also enquire about the reason of surrender. You may state financial reasons, unacceptable returns or services, etc.
- Generally, Tax @ 2% is deducted if legitimate PAN details are provided. But in case PAN is not available with the insurance company, the amount will be taxed at 20%.
- If you are surrendering an endowment policy, then you will get the surrender value as payout. But if you are surrendering a plain term plan, then there would be no payout, as it does not have any savings component and hence no surrender value.
And if I don’t want to surrender?
For those who don’t want to surrender their policies, there is another option. And that is to make your policy Paid-Up. It means that you will stop paying your further premiums and your insurance cover will come down by a ratio equal to that of period for which payment has been made to that of full maturity period. For example, if you policy tenure was 20 years and cover was Rs 20 lakhs , and you have paid your premiums for 5 years and then decide to make it paid up, then your cover will come down to Rs 5 lakhs , because you have paid for just 25% of tenure.
It is always better late than never in case of rationalizing a life insurance policy. So if you think you bought a policy by mistake and there is still a long way for it to mature, make it a point to either surrender it or make it Paid-Up.
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