The surrender value of a policy
Surrender value can be simply termed as the amount that a policyholder will get once they exit from the policy before the maturity of the policy is over. When a policyholders surrenders their policy mid way through the entire term, they will get a value of the sum that had been allocated towards the savings and the earnings of the policy and so on. A surrender charge is deducted from this value and this charge can differ from policy to policy.
According to a recent directive that has been issued by the Insurance Regulatory Development authority or the IRDA, life insurance companies have been asked not to levy the surrender charges if the insurance cover holder terminates the policy after 5 years.
In normal scenarios if the policyholder has been paying premiums for 3 consecutive years, then the policy also acquires a surrender value. However if the policyholder decides not to pay premiums after 3 years, then they can freeze the policy and turn it into a paid one. This means that the investments are frozen at that level. In this case the policyholder will have to keep track of the policy till it matures.
There are several things that a policyholders stands to lose when they surrender their policy
The first and the foremost thing that ceases to exist when you exit the policy is the insurance cover that ceases to exist. Now if you really believe that a policy isn’t meeting your requirements should you think about exiting the policy? In fact the surrender value will be roughly about 30% of the premiums that you have paid in the first 3 years if you plan to make an early exit. Also remember that insurance companies exclude the premium that has been paid by the policyholder when they calculate the surrender value for a particular policy.
In the Unit Linked Schemes or ULIPS as they are known as, the investors stand to lose a great deal. This is because, a sizable amount of the premiums that are paid in the first few years are allocated for various charges. In fact the first premium that you pay is almost entirely used for paying a number of charges and commissions such as the agent’s commissions. The portions that are left over will be allocated as investment for your fund.
In fact the surrender value of the policy has other uses also. The company also uses the surrender value that is calculated for giving a loan if you are eligible for taking a loan against your policy. Many of the life insurance companies may also offer the policyholder up to 85%-90% of the surrender value. LIC for one offers such loans that carry an interest rate of 9% per annum.
You can also pledge your policy with a bank for the loan that may be required by you. However when you pledge for a loan against the policy do so in the later years of the policy as the surrender value of the policy increases.
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