Insurance

What you stand to benefit and lose on surrendering a life insurance policy

One in four life insurance buyers do not renew their policy after paying the first premium. Further, premature termination or surrender after the minimum lock-in translates to total loss of premiums paid or reduced benefits.

ET Wealth calculates the benefits and losses one stands to incur at various stages of a policy.

I. TRADITIONAL ENDOWMENT PLAN

Policyholder: 35-year-old woman
Policy bought: LIC’s New Jeevan Anand
Annual premium: Rs 30,492
Sum assured: Rs 5 lakh
Tenure: 20 years
Bonus: Rs 45 per Rs 1,000 sum assured**

Guaranteed surrender value factor after year 3 and year 10: 30% and 57.50%

* Policyholder’s action: Continues with policy till maturity
Implications: She will get the sum assured and accumulated yearly bonuses at the end of 20 years.

* Policyholder’s action: Let policy lapse before paying three premiums
Implications: She will have to forgo the entire premium paid. If she has paid only one premium, the loss will be Rs 30,492*

* Policyholder’s action: Converts policy into a paid-up one after paying three annual premiums
Implications: Policy continues be in force with a paid-up value of Rs 1.42 lakh, payable at maturity.

* Policyholder’s action: Surrenders the policy after three premiums have been paid
Implications: She will get Rs 42,750

* Policyholder’s action: Surrenders the policy after paying 10 premiums
Implications: Stands to get Rs 81,937.

How to calculate paid-up value: [Number of years for which premiums were paid / policy tenure x sum assured] + [Bonus / 1,000 x sum assured]

How to calculate surrender value: [Surrender value factor x paid-up value] / 100

II. UNIT-LINKED INSURANCE PLAN (ULIP)

Policyholder: 35-year-old
Policy: Max Life’s Online Savings Ulip
Assumed rate of return: 8% per annum
Tenure: 15 years:
Annual premium: Rs 50,000
Sum assured: Rs 5 lakh

* Policyholder’s action: Continues with policy
Implications: All promised benefits will continue. She will be entitled to maturity benefit of Rs 12.93 lakh at the end of 15 years.

* Policyholder’s action: Discontinues or surrenders policy in third year, before the expiry of the five-year lock-in
Implications: Will be entitled to Rs 1.67 lakh** after the end of lock-in period, after deduction of surrender charges.

* Policyholder’s action: Surrenders the policy in the fifth year
Implications: Will get Rs 3.01 lakh and will not have to pay surrender charges.

* Policyholder’s action: Surrenders the policy in the tenth year
Implications: Will receive Rs 5.75 lakh. Will not pay surrender charges

** Post the lock-in period, the fund value, minus the discontinuance charges, which as per IRDAI rules for annual premiums over Rs 25,000, range from 6% of annual premium or fund value (maximum of Rs 6,000) in the first year to 2% of annual premium or fund value (maximum Rs 2,000) in the fourth, will be paid. Till the end of lock-in, the money lies in discontinuance fund, earning 3.5% per annum. No surrender charges after lock-in.

III. PURE PROTECTION TERM INSURANCE

Policyholder: 35-year-old non-smoking male
Cover bought: Rs 1 crore
Tenure: 25 years
Annual premium: Rs 10,000

* Policyholder’s action: Continues with policy till the end of original policy tenure
Implications: The risk cover will be in force till the end of 25 years*; Nominees will get Rs 1 crore in case of insured’s death

* Policyholder’s action: Stops paying premium before the end of the premium paying term
Implications: The policy is terminated once the grace period for paying premiums gets over. Dependents will not be eligible for any claim in case of policyholder’s death

 

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