Surrendering Your Policy? 5 Things to Consider First

Sep 25, 2019 | 2 months ago | Read Time: 4 minutes | By iKnowledge Team
5 Things to Consider before Surrendering Your Policy

Surrendering an insurance policy means completely withdrawing from the policy and terminating it. A surrender can be done for many reasons including:

  • Better insurance policies at lesser premium
  • If the policyholder cannot afford life insurance

But before surrendering life insurance, it is worth examining a few points so that you don’t end up surrendering the insurance policy at a loss.

Here are 5 things to consider before surrendering your policy:

  • Type of policy:

Surrendering a policy before its term will not yield anything if it is a health insurance policy or a term insurance policy. The nature of these two policies is such that the premium paid is for the year and if premium is not paid, the policy lapses. Thus, only policies that give benefits on maturity can be surrendered. If you want to surrender a life insurance policy, make sure that it is a policy that can be surrendered.

  • Benefits accruing in the near term:

A lot of policies have benefits that accrue such as a no claim bonus in health insurance policies. A few benefits such as dental coverage get added on to reward the customer for their continued investment in the policy. Similarly, for life insurance plans, certain benefits, bonuses and other rewards accrue after the policyholder has stayed with the company for an amount of time. If these benefits are going to accrue in the near term, it does not make sense to surrender the policy and lose out.

  • Surrender value:

A lot of times, insurance policies are surrendered to get the surrender value in times of need. The Insurance Regulatory and Development Authority of India (IRDA) has come out with a method to calculate the surrender value for insurance policies with a term of 7 years. If the policy is surrendered after 7 years, the guaranteed surrender value can be determined by the insurance company after getting approval from IRDA.

Guaranteed surrender value for a non-linked policy depends on the policy term, and the premium paying term. If the life insurance policy term has a premium paying term (PPT) of more than 10 years, the guaranteed surrender value gets activated on payment of 3 premiums. For a life insurance plan with PPT of less than 10 years, the guaranteed surrender value gets activated on payment of 2 premiums.

Guaranteed Surrender Value will be 30% of the total premiums paid if the policy is surrendered in the 2nd or 3rd year. The first-year premium will be considered in the total premiums paid.

This surrender value will go up to 50% of premiums paid if the policy is surrendered between the 4th and 7th year of the policy. If the policy term is less than 7 years, the surrender value will be 90% of the total premiums paid if the surrender is done in the last two years of the policy.

The Surrender Value for a linked plan, or ULIP is different. ULIP policies have a mandatory lock in period. If the policy is surrendered during the lock in period, the amount will be refunded after completion of lock in. The income earned on the investment will be bifurcated between the discontinued policy and a fund maintained by the insurer.

If a ULIP is surrendered after the end of the lock in period, as per IRDA rules, no charges will be charged for such a surrender. The entire fund value will be paid to the policyholder.

If you are looking for flexibility in your insurance policies, it is best to get a policy from an insurance company that allows you to be in control of your investments.

  • Whether a similar policy is available at lesser premium or the same premium gets more benefits:

The main purpose of an insurance policy is to provide cover. If you find a similar policy with similar coverage at a lesser premium, it is beneficial to shift, especially if you have a term policy. Term insurance plans lapse in case of non-payment which makes it beneficial to switch in case of better options. But in case of traditional life insurance plans, the premium depends on the age of the applicant. If the applicant surrenders the policy when he has reached a certain age, he should make sure he gets a comparable or a better policy, otherwise it makes no sense to surrender.

  • Can the insurance company amend your policy so you don’t pay premium but are still covered:

A lot of insurance companies have the option to continue the policy if you don’t pay premium. It is known as Paid-Up Insurance policy. In this type of life insurance, the sum assured is reduced in the ratio of premium paid to the total premium paying term. All future bonuses are stopped, but existing bonuses continue. The reduced sum assured will be paid out on maturity or death. These types of policies are not very beneficial to the policyholder. It may be beneficial to simply exit completely than to take this option.

To know about Aegon Life’s products like term insurance and other products, visit our home page.


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