by Jenny Dsouza
Published Thu, Apr 6th 2017, 10:20 | Business
Buying a term insurance plan is ideally a smart move towards financial security. More often than not, customers get influenced by peers and colleagues and buy a plan that may be good for their friends, but not for them. Once stuck with the plan, they are not able to decide whether to continue with it or surrender it. Continuing means paying the premiums year after year without substantial benefits while surrendering the plan comes with its own set of complications. However, life insurance companies do offer a way out by offering a surrender value as regulated by the Insurance Regulatory and Development Authority of India (IRDAI).
What is a Surrender Value?
In simple words, it is the amount that a policyholder will receive from the insurance company in case he opts to surrender the policy, for whatever reasons, before its maturity. The insurer will calculate the policy amount based on premiums received till the date of termination, deduct certain charges and return the balance amount to the customer.
Is it Applicable on Term Plans?
The surrender value is not applicable on all kinds of term insurance policies. It works only for those plans that have a part of the component catering to the savings or investment component of the premiums like the ULIPs or in those cases where single premium is paid to cover for the long term of the plan.
Also, a customer will be eligible for the surrender value under term plans only if:
· The insured has bought a term plan with return of premium (TROP).
· The insured has opted to pay his entire premiums towards buying the term policies under a single pay regime offered by the
In other words, surrender value will not work for regular term plan that have regular annual premiums.
When is the Surrender Value Applicable?
As per the IRDAI Non-Linked Insurance Products Regulations, 2013, if the policy term is 10 years or more then the policy will acquire the surrender value only after three years of paying complete regular premium. In case the policy term is less than 10 years, then two years of complete premium payment will get you the surrender value. However, if you terminate the policy before the plan acquires surrender value, i.e. 2 or 3 years as the case may be, then you will not get any money on terminating the policy. To apply for surrender value, life insurance companies need to be informed in writing about policies being terminated or else they continue the plan as a paid up plan.
How is the Surrender Value Calculated?
Any term plan in India is guided and regulated by the IRDAI. Even the guaranteed surrender value calculation has been defined by IRDAI as follows:
· 30% of the total premium paid less any survival benefits already paid, if surrendered between 2nd Or 3rd year, both inclusive
· 50% of the total premium paid less survival benefits already paid if surrender between 4th to 7th years, all inclusive
· 90% of the total premium paid less any survival benefits already paid, if surrendered in the last 2 years of the policy, if the policy term is less than 7 years
Here, the important thing to be considered is that even if there is a surrender value component applicable to the term plan with one single premium or term plan with return, it will not include premium paid towards any riders.
As you have noticed that terminating your policy early in its term will lead to low surrender value, therefore, it makes sense to terminate the plan only if it’s an urgent cash requirement. Otherwise, it is better to stay invested for a long haul to earn the benefits of the plan. Every term plan in India is more or less beneficial to the majority of the policyholders. If, in your case it has proved to be of no use, you can terminate it and invest in a plan that meets your requirements. But, at all times do stay insured, do cover your risks!
Source:http://www.suggestinsurance.com/blogs/do-term-plans-offer-surrender-value/