Is surrendering your life insurance really the best option?
PNB MetLife India 18-09-2015 06:28:11 AM
There are times when you are faced with a situation where liquidating your assets seems like the best option available. This might be due to a financial emergency, while in other cases you may receive a more lucrative investment offer which makes you relook at your existing portfolio of investments. However, when exiting a life insurance policy, one must consider certain critical factors before making any hasty decisions. It is important to understand that life insurance is primarily a protection tool to financially secure your family’s future in case something was to happen to you.
To put it simply, when you surrender a life insurance policy you lose out on all benefits associated with it; i.e. death benefits and maturity benefits. Also, since insurance policies are typically issued for long-term, the fund managers invest with a long-term objective hence these products usually deliver results over a period of time. Since the basic premise for buying insurance is long term protection, surrender charges come into play if you decide to prematurely exit the policy.
Therefore, liquidating a life insurance policy should be the last step that you should take incase you need emergency funds. Also, while deliberating on whether or not to exit an insurance policy in lieu of a more lucrative option offered by your agent, you need to consider the fact that there would be surrender charges on the existing policy. And the new policy that you invest in will come with entry charges, hence neutralizing any benefit that you can hope to gain. A surrender charge is levied on policy holders upon cancellation of their policy before maturity; i.e. the pre-defined length of the policy term, and is designed to cover the cost of keeping the policy on an insurer’s books. It also helps the insurer offset additional costs incurred due to early termination of your policy. It is calculated as a percentage of the premiums paid by you till the date of surrender.
Starting effective January 1st, 2014, the insurance regulator (IRDA) has revised the surrender charges, rewarding those customers who stay invested for long-term, while ensuring that those who exit prematurely don’t get a raw deal and lose the majority of their investment. As per the new guidelines, those who exit within two to three years get minimum of 30% of premiums paid as surrender value. On the other hand they get 50% if they exit between four to seven years and 90% if they stay invested up to two years prior to maturity. So it is evident that staying invested for the entire length of the policy term is the most profitable scenario, while ensuring you and your family are adequately protected financially.
I would end by re-iterating that insurance is typically bought to protect your family’s future income or as an investment for your child’s education or retirement. Insurance is a long-term asset class; hence, surrendering an insurance policy should be the last option when liquidating your portfolio.