The Insurance Regulatory and Development Authority of India (IRDAI) recently revamped life insurance surrender value rules, including making policy loans mandatory and setting faster claim settlement timelines (7 days for insurers, 15 days for surveyors).
What is Insurance Surrender Value?
Surrender value is the money an insurance company pays you if you cancel your policy before it matures. The amount depends on how much you’ve paid in premiums and for how long. This option is typically available with life insurance policies that build cash value, like whole life, endowment, and universal life insurance.
How is the Surrender Value Calculated?
Surrender value breaks down into several parts:
- Accumulated Premiums: This is a portion of your payments allocated towards the policy’s savings or investment account.
- Bonuses and Dividends: These are additional amounts the insurance company might add to your cash value based on their performance.
- Interest Earned: This is the interest your accumulated premiums have grown over time.
- Surrender Charges: These are fees deducted if you cancel your policy early, typically higher in the initial years and decreasing over time.
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Formula to calculate the surrender value:-
- Surrender Value=Accumulated Premiums+Bonuses and Interest−Surrender Charges
Types of Surrender Values
There are two ways to calculate your surrender value:
- Guaranteed Surrender Value: This is the minimum amount the insurance company is obligated to pay if you cancel your policy. It’s a set percentage of your total premiums paid, usually outlined in your policy documents (e.g., 30% after three years).
- Special Surrender Value: This can be higher than the guaranteed amount and depends on factors like policy performance, duration, and current bonuses. Insurance companies determine this when you surrender the policy.
Points to note when cancelling your Policies
When cancelling your life insurance policy and receiving the surrender value, it is essential to consider several key factors.
Check the cancellation refund amount:Before terminating your life insurance policy, confirm the surrender value by examining policy documents and consulting with the insurance provider.
You will be subject to taxes if you profit from the surrender value: When you receive a surrender value from your life insurance policy, be aware that any profit exceeding the total premiums paid will be taxed as a lump-sum income. The taxable amount is calculated by subtracting the lump-sum income deduction from the surrender value and premiums paid, and then halving the result. Additionally, if you are self-employed and your lump-sum income is less than $200,000, you may be exempt from filing a tax return.
Three strategies to increase the value of your surrender
To maximize the surrender value of your life insurance policy, consider the following key factors:
- Timing: Surrender your policy at the right time, considering market conditions, policy accumulation, and bonus declaration to ensure the highest value.
- Policy Type: Ensure your policy has an investment component, such as a unit-linked insurance plan (ULIP) or endowment plan, which provides a surrender value.
- Premium Payments: Pay premiums consistently for a specified period, usually three years, to be eligible for the surrender value.
- Surrender Fees: Understand the surrender fees and how they impact the amount you receive upon surrendering the policy.
- Alternative Options: Explore other options, such as taking a loan against the policy or converting to a term insurance plan, before surrendering the policy.
- Tax Implications: Be aware that surrendering a policy may result in taxable income and impact your overall tax liability.
- Policy Conditions: Review the policy terms and conditions to understand the surrender value calculation and any restrictions.
By considering these factors, you can make an informed decision and maximize the surrender value of your life insurance policy.
