Ever wondered what happens to your money if you need to cancel your insurance policy before it matures? That’s where surrender value comes in. The IRDAI (basically the insurance rule maker in India) sets some guidelines about how much you get back depending on your policy type.
Let’s break it down in a way that’s easy to understand, with a handy table and some FAQs to clear things up!
What kind of insurance are we talking about?
There are two main types:
- Regular Insurance (Non-Linked): This is the classic life insurance or endowment plan. You pay a fixed premium, and you (or your beneficiary) get a guaranteed payout in case of death or when the policy matures. Think of it like a safe piggy bank that pays you back later.
- Market-Linked Insurance (ULIPs): This I have explained in my previous post – Here, a part of your premium goes into the market, so your returns depend on how the market performs. It’s like investing your money while also having some life insurance coverage.
Surrender Value for Regular Insurance
| Year you cancel your policy | Minimum guaranteed money you get back |
| 2nd Year | 30% of total premiums paid – any benefits you already received |
| 3rd Year | 35% of total premiums paid – any benefits you already received |
| 4th to 7th Year | 50% of total premiums paid – any benefits you already received |
| Last 2 Years | 90% of total premiums paid – any benefits you already received (gradually increases from 7th year onwards) |
| Single Premium (paid all at once, canceled within 3 years) | 75% of total premium paid – any benefits you already received |
| Single Premium (canceled after 4th year) | 90% of total premium paid – any benefits you already received (gradually increases from 4th year onwards) |
What is Unit Fund Value (related to a ULIP?)
Imagine your ULIP policy as a piggy bank that invests some of your money in the stock market. The unit fund value is basically the total value of all those investments at any given time. So, if the market goes up, your unit fund value goes up too, and if the market goes down, well, you get the picture.
Surrender Value for Market-Linked Insurance (ULIPs)
- During the lock-in period (stuck for a while): If you cancel during this time, the value of your investments (unit fund value) minus any fees will be put aside. The life insurance coverage stops, but you get the money at the end of the lock-in period. It’s like you can cancel the policy but won’t get money immediately.
- After the lock-in period (you’re free!):
- Canceling (surrender): You get at least the unit fund value on the day you cancel.
- Missing premium payments: Your policy might become a “reduced paid-up plan” with a lower payout based on how many premiums you’ve paid. You still have some coverage, but not as much. Any extra benefits (riders) might also disappear.
- Not reviving the policy after a grace period (gone forever): The policy is canceled, and you get whatever leftover money is in your investment piggy bank (unit fund value).
Group ULIPs: There might be a small fee (maximum 0.05% of your investment value, capped at Rs. 5 lakh) if you cancel within the first 3 years.
FAQs: Got questions? We’ve got answers!
Q1: Why would I cancel my policy?
A: Life throws curveballs! Maybe you need the money for an emergency, or your financial situation has changed.
Q2: Will I lose money by canceling?
A: Probably. Especially in the initial years, the surrender value might be much lower than the premiums you’ve paid.
Q3: Should I just cancel or is there another way?
A: Cancelling should be a last resort. Talk to your insurance advisor!
Q4: Can I get a loan on my insurance policy?
A: You might be able to take a loan against your policy instead of cancelling it completely. It is IRDAI guidelines, Loans shall not be allowed under the Unit Linked Insurance Products.
Q5: Where can I find the specific surrender value for my policy?
A: Check your policy document or call your insurance company. They’ll be happy to help!
Remember
Cancelling your policy means losing some benefits and potentially some money. It’s always best to discuss your options with your insurance advisor before making a decision.
You can check the interest rate (click here) you may get on your life insurance policy so that you can make a well informed decision before investing.
