Policyholders can surrender their insurance policy before maturity if they have paid the premiums for three or five years from the date of inception. If the policyholder has not paid the premiums for at least three or five years, he is not entitled to get the surrender value or paid-up value. Today I will take you through life insurance policy cancellation process.
I will try to answer all the questions that pop-up in a policyholder’s mind when he thinks of surrendering his insurance policy.
As mentioned above, in order to surrender insurance policy, policyholder should have paid premiums for at least till the lock-in period, which is usually 3 to 5 years.
Those who have not paid premiums till the lock-in period should not bother instead they should stop paying premiums (disable auto-payment, if enabled) and eventually, after the grace period, their policy will lapse.
Next, we will discuss how to discontinue an insurance policy. But before describing the process of surrendering policy, I strongly recommend that you should know the advantages and disadvantages of surrendering a policy.
In my opinion only a few reasons justify life insurance policy cancellation.
Additionally, before doing so, I suggest that you explore other options such as converting policy to a paid-up policy, taking a loan on policy and requesting partial-withdraw to meet your financial needs.
If you’re going to surrender your policy to fulfill your financial needs then I suggest you thing of above mentioned alternatives.
Most experts of this field recommend that discontinuing an insurance policy is not a good idea because they only get a small portion of their investment in the form of surrender value.
What is paid-up value and surrender value?
Paid-up value: If policyholder stops paying premiums after the lock-in period but does not surrender his policy, in that scenario, he can convert his policy to a paid-up policy. When policy’s term ends, insurance company pays the sum insured to the insured/nominee according to the premium paid.
The amount to be received from a paid-up policy is called paid-up value. Note: Every policy cannot be converted into a paid-up policy, so contact your insurance company to know if your policy can be converted into paid-up.
Surrender Value: When someone surrenders insurance policy, insurer pays cash amount (after deducting surrender charges) to the policyholder in the form of surrender value. Life insurance policy cancellation request is a loss for the company therefore to compensate the loss it applies surrender charges.
It is noticeable that insured gets a very small portion of his premium paid as surrender value. Therefore it’s not advisable especially if premiums have been paid till the lock-in period.
If someone has paid the premium for a longer period and policy reached to maturity then policy cancellation would not be a good option. In such a situation, policyholder should try to pay the premiums till the maturity or convert the policy into paid-up.
Benefits of discontinuing insurance policy:
- Although there is no benefit in discontinuing an insurance policy, it can still be cancelled in certain circumstances.
- If a person has more than one insurance policies or is over insured, it’s wise to cancel one policy to save the money.
- If you have mistakenly chosen a policy (or become victim of policy misselling) that do not meet your needs, you can discontinue your policy. Note: Every insurance policy comes with a 14-day cooling-off period in which if the policyholder feels that the policy is not right for him, then he is entitled to surrender the policy and get full refund of premium paid.
Disadvantages of closing insurance policy:
- If you have paid your premiums for a certain period. For example, suppose your insurance policy term is 15 years and you have paid premiums for 10 years, then in such a situation Life insurance policy cancellation is not a wise decision.
- Upon cancelling insurance policy, cash surrender value is comparatively low compared to premiums paid.
- Insurer bears the loss therefore policy surrender chargers are very high.
- Surrender value is not applicable on every policy, only policies with investment components come with surrender value.
In a separate post, we have discussed frequently asked questions pertaining to policy surrender.
Instead of discontinuing your insurance policy, you can think of the options given below.
If your reason for life insurance policy cancellation is financial then you can think of partial withdrawal rather than discontinuing your policy. The policy holder can withdraw portion of accumulated cash (due to the investment component).
By doing so, one can fulfill his financial needs without taking a risk of being uninsured.
Take a loan on policy
You may not know but you can take a loan by pledging your insurance policy. By doing this, your financial needs will be fulfilled and you will not need to surrender your policy.
Make policy paid-up
If you are unable to pay your premium then you can contact your insurance company and convert your policy into paid-up. When you have paid your premiums for a certain period (3-5 years) in which surrender value has been accrued and remaining premiums can be paid from that surrender value, then the insurance company allows such policy to be converted into paid-up policy.
By converting your policy to paid-up, you do not have to pay remaining premiums but benefits remain intact. Contact your insurance agent for more information.
For Unit Linked Plans, lock-in period is 5 years and for other polices (with saving or investment components) limit is 2-3 years.
Consider these options before surrendering a life insurance policy.
Let the policy lapse automatically
If your policy has not acquired any surrender value then you can simply stop paying your future premiums and after the grace-period your policy will be lapsed automatically.
Your life insurance policy will be cancelled from insurer’s side. Just make sure you disable auto-debit facility from your bank account or credit card, if enabled.
Step-by-step life insurance policy cancellation process
If above recommendations do not solve your problem then read to know how to surrender insurance policy.
- For life insurance policy cancellation, visit your insurer’s official website and download policy surrender form. You can visit the nearest branch of your insurance company and ask for a policy withdrawal form. You may need to submit your identity proof, bank passbook, latest contact details along with genuine insurance policy documents.
- Don’t forget to collect acknowledgement receipt from your insurer for future reference.
To save your valuable time, you can download the policy surrender form from your insurer’s website. Nowadays, many insurance companies are providing online facility to buy insurance policy, pay premiums, submit claim and request policy withdrawal as well.
Suggestion: Consult your insurance agent or a friend before you surrender insurance policy (it is an important thing therefore every little advise counts).
Frequently Asked Questions
Is it good idea to surrender policy?
Well, not especially if you have been paying your premiums for a long time. Only a few reasons (such as one can think of surrendering a policy if he is over-insured, or has become victim of policy misselling, or has been going through financial hardships) justify policy surrender.
You should think of above mentioned policy surrender alternatives before you finally cancel your insurance contract.