Endowment plans offer savings cum insurance solutions to the proposer. If after taking up a policy, you decide to terminate it, the insurer will levy closure charges before refunding your money. You are eligible to receive a Guaranteed Surrender Value (provided you meet certain policy conditions). In this post, we will discuss concepts such as “Guaranteed Surrender Value,” “Special Surrender Value,” “Paid Up value,” and whether or not you should surrender your endowment plan.
If you decide to terminate your endowment plan, you can do so by stopping to pay your premium amount. If you stop paying your premium amount before the end of the policy term, you are eligible to receive an amount called the surrender value (provided you have paid the policy premium for three consecutive years). Broadly, there are two types of Surrender Value – Guaranteed Surrender Value and Special Surrender Value. Have explained each of these in further detail below.
Guaranteed Surrender Value is equivalent to a percentage of the total amount of premiums paid by the policyholder excluding the premium amount paid for the first year, premium paid for additional riders such as accidental death benefit cover and surrender charges (as applicable). Typically, Guaranteed Surrender Value is 30% of the premium paid minus the first year premium, premium for additional riders and surrender charges. As per an IRDA (Insurance and Regulatory Development Authority of India) directive, life insurance companies have been asked not to levy surrender charges if the policyholder chooses to terminate the cover after five years.
To illustrate, the Guaranteed Surrender Value for a Sum Assured of Rs.5 Lakhs with a premium payout of Rs.25,000 per annum is as follows:
Assuming you decide to terminate the policy at the completion of three years.
You have paid Rs.75,000 (Rs.25,000 annually for three years)
The premium paid for the first year is deducted
Payout: 30% of premiums paid (i.e., 30% of Rs.50,000)
You are eligible for a Guaranteed Surrender Value of Rs.15,000 (Assuming there is no premium paid on additional riders).
Note: Have not calculated surrender charges as this varies from insurer to insurer. Also, this does not include the bonus that you may have received from the insurer. If your policy has accrued bonus, the amount you will receive on surrendering the policy is called the Special Surrender Value. This is arrived at by multiplying the total paid-up value (Paid up value is the amount of the number of premiums paid from the commencement of policy) with a multiplier called the Surrender Value Factor. The Surrender Value Factor is zero for the first year and increases each year beginning the third year. The percentage varies from company to company and is based on factors such as the number of policy years completed, time to maturity, policy type, company philosophy, industry practice, etc.
Now that you have understood the amount you will receive in the event you want to terminate your policy, let us examine whether or not you should surrender your policy.
On surrendering your endowment policy, you will have to take the following into account:
i. Insurance cover ceases: Your insurance cover ceases to exist, the moment you terminate your endowment plan. All benefits associated with your term plan will cease to be applicable.
ii. Tax Benefits: You can no longer claim tax benefits under section 80 C of the Income Tax Act towards premium payments for your insurance plan.
iii. Better Returns: It makes sense to surrender an endowment policy only if the amount received on doing so and invested in an alternative instrument can generate a better return than the endowment plan would have at maturity. Also, factor in the amount lost at surrender and the lost tax benefits to the bottom-line of the amount that the new instrument promises to fetch to understand if it is worth it.
iv. Paid-up Value: If your decision to terminate your endowment plan is not a result of your wanting to invest in another product but due to monetary constraints or other factors, you should know about the concept of “Paid-up Value”. Because it will help preserve a corpus for your retirement needs.
After paying for three consecutive years, without any premium defaults, you can convert your endowment plan into a paid-up one, freezing your savings at that point. Please ensure you monitor your policy until it matures.
Please note that Surrender value is not applicable for all policies. Only policies that contain an embedded savings component such as Endowment plans and ULIPs, provide a Surrender value. Term plans, which are pure protection plans, with no investment/savings component, do not offer any amount on premature termination of the policy.
If you decide to terminate your endowment plan, it is advisable to take an independent decision taking all factors into consideration. It is recommended that you consult with your insurance agent or financial planner while taking a decision in this regard. The objective of this write-up is to bring the cons of terminating an endowment plan prematurely. It is in no way a recommendation to continue with your current plan and as such should not be treated as one.