Life insurance is something we all buy for the secure future of ourselves and our families. However, sometimes financial circumstances arise in life where paying the premium becomes a burden. In such situations, the thought of discontinuing or surrendering the policy prematurely is very natural. If you are also considering surrendering your LIC policy before maturity, then wait. Surrendering a policy not only ends your coverage but can also result in a significant loss of your accumulated savings. It is crucial to understand this entire process and its advantages and disadvantages.

What is Policy Surrender?

In the world of insurance, when you terminate a policy before its stipulated term and request a refund from the insurance company, this process is called 'policy surrender'. People generally assume that they will get back all the money they have paid as premiums. However, the reality is different. The amount the company returns to you is called the 'surrender value'. This amount can be significantly less than the total premiums you have paid. The policy documents mention surrender charges and other deductions, which people often overlook. As a result, the money saved for help in times of need is returned at a much lower amount than expected.

Not just money, but the safety net also ends

The biggest and most serious disadvantage of surrendering a policy is not financial, but rather in terms of security. As soon as you surrender the policy, your life insurance coverage ends immediately. This means that if any unfortunate event happens to the policyholder in the future, their family or nominee will not receive any death benefit. The very purpose for which you took out this policy years ago remains unfulfilled. The situation is even more different in the case of term insurance. Term plans do not have a savings component, so if you discontinue them midway, you neither retain coverage nor get any money back.

Why is a large portion of your savings deducted?

Policyholders often ask why they don't get all their money back. The mathematics of insurance is at play here. A large portion of the premium you pay in the initial years of the policy goes towards agent commissions, administrative costs of issuing the policy, and underwriting charges. This is why if someone cancels the policy within the first 2 to 4 years of its inception, they suffer a significant loss. Benefits like bonuses and loyalty additions offered in endowment or money-back policies also become zero upon surrendering the policy. This means that the benefits you could have received by maintaining the investment for a longer period are lost in an instant.

What is a better option than canceling the policy?

If you are facing financial difficulties and paying premiums is difficult, canceling the policy is not the only option. You can make your policy ‘paid-up’. This is a kind of middle ground. In this, you stop paying further premiums, but the policy does not terminate. It continues until maturity with a reduced sum assured. Although the benefits received are reduced, your coverage does not completely end. Additionally, the insurance regulator IRDAI has recently made some changes to the rules, which may allow policyholders to receive a slightly better surrender value in certain circumstances than before. Therefore, before making a final decision, be sure to ask your insurance company for calculations of both the ‘surrender value’ and the ‘paid-up value’.

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