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9 Questions on Surrendering a Life Insurance Policy Answered!

9 Questions on Surrendering a Life Insurance Policy Answered
Amrita has diligently paid life insurance premiums for four years, but now wants to terminate the policy and collect the cash value because she needs the money. So she calls up her agent, who says, ‘Not a good idea.' That is when Amrita first hears the terms ‘surrender charges' and ‘surrender value'.

#1: What Are Surrender Charges?

A surrender charge is a penalty levied by the insurance company when the policyholder terminates the policy in the early years of the policy term. Such penalties are levied to offset additional costs incurred by the insurer because of early termination.

#2: Are They Applicable Throughout the Policy Term?

Surrender charges are levied for a specific period, not the entire policy duration. The Insurance and Regulatory Development Authority (IRDA) has ruled that insurance companies in India can levy surrender charges for no more than five years.

Hence, if Amrita waits a little longer and exits the policy at the end of five years, she can conveniently avoid the surrender charge hurdle.

#3: What Is Surrender Value?

If Amrita exits the policy, the insurance company will pay her a portion of the savings and interest thereon-minus the surrender charges if this is within the five-year period. The amount that Amrita receives represents the policy's surrender value.

#4: Does Surrender Value Apply to All Policies?

No. Surrender value applies only to policies with a savings component. Traditional term plans do not have surrender values, but Unit Linked Insurance Plans, i.e. ULIPs and Endowment policies do because of their integrated savings feature.

#5: When Will My Policy Acquire Surrender Value?A policy develops surrender value if the policyholder has paid premiums over three continuous years.

In Amrita's case, the policy has already acquired surrender value because she has paid premiums over four years. However, the surrender charges still apply because the five-year period has not ended yet.


#6: What Can I Do Once the Policy Has Surrender Value?

Amrita is keen to exit the policy because she needs the money urgently. Had this not been the case, she could have converted the policy into a paid-up one anytime after it attained surrender value. In doing so, she would be able to bypass the surrender charges. Since four years have passed in Amrita's case, the investment would be frozen at the four-premium level. Amrita's only headache thereafter would be to keep tabs on the policy until maturity.

#7: What Will I Lose if I Exit the Policy?

When you surrender a policy, you are effectively giving up all the benefits, including death or maturity benefits. If you quit the policy before the first five years are up, the surrender charges will eat into your receivable amount.

#8: When Is It Okay to Surrender a Policy?

Life insurance makes sense only in the long term. Ideally, you should exit a policy only if it does not meet your financial requirements or you feel that the agent mis-sold it to you.

#9: Will Surrender Value Matter if I Continue the Policy?

Indeed, it will. The longer you keep the policy, the more the accumulated surrender value. Some insurers offer loans against this surrender value, and you can take a bank loan against the policy as well. The latter would not affect your policy value and would also offer tax benefits.

Written By: Deepak Yohannan

The author is the CEO of, an online insurance price & features comparison portal

For more articles by Deepak Yohannan, please visit

You may write to the author at

Read more about: life insurance
Story first published: Saturday, May 25, 2013, 16:53 [IST]
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