Does It Make Sense To Surrender An Endowment Policy?

Life insurance policies in the present day and age are an un-skippable investment. These investments help not only protect your life, but also shield your family’s finances. In the event of an unfortunate demise of the policyholder, a life insurance policy is what kicks in to provide financial coverage to the dependents.

Life insurance can be divided into two broad categories based on the features they provide. One is a pure insurance plan that only provides protection whereas the other type is where investment and protection are joint objectives of the life insurance cover. A term insurance plan is an example of a pure life policy whereas an endowment policy is an example of life insurance cover with investment goals.

Buying a life insurance plan is necessary for robust financial planning, but there can be situations when you need to surrender your policy. Surrender is the process where you, the policyholder, opt-out or cancel your insurance cover. Thus, the insurance policy ceases to provide any coverage once surrendered. Depending on the insurance company, and the type of policy, whether it has a cash value or investment as a part of it, it can be simple or complicated to surrender one.

What are the reasons to surrender a life insurance policy?

While there are many reasons to cancel your existing life insurance coverage, switching jobs, no more beneficiaries to support, and better coverage available, are some reasons to forgo existing life cover.

For instance, you change your job and your employer offers better insurance coverage for a cheaper rate than what you are currently paying.

Having better insurance coverage is a smart way to reduce your overall outlay on insurance spending and keep the premiums in check.

If you no longer have any dependents that you need to support by way of the death benefit, it is best to surrender the policy. Since you will not be able to benefit from the death benefit that your life insurance plan provides, it is best to surrender in such a scenario. In this situation, you can make better use of the funds in alternative investments.

Another reason to surrender the policy is to gain the cash surrender value, but this only works for policies that have a cash value built-in.

What is the surrender value of an endowment policy?

The surrender value is the amount which the insurance company pays on surrendering the endowment plan subject to certain conditions. For instance, certain endowment policies may specify a minimum period of two or three years only after which any surrender value is paid by the insurance company.

There are two types of surrender values. One is the minimum guaranteed surrender value and the other is a special surrender value. The former is stipulated by the law, whereas the latter indicates the value of your investment. There is a difference between the two during the initial years of your policy; however, as the policy ages, the special surrender value becomes higher than the minimum guaranteed surrender value.

The amount that the insurance company pays as the surrender value depends on factors like premium amount, premium paid, bonus and more.

Should you surrender your endowment policy?

It is generally not advisable to surrender your life insurance cover. It is due to the following reasons:

• Surrendering your endowment policy will leave you unprotected from any coverage that your policy provides. While you can always choose to buy another policy, you are exposed to the perils until the new plan is approved.
• There is a possibility that your new insurance plan may cost you more. This is due to reasons like increasing age, increasing health conditions, and even more pre-existing diseases at the time of purchase.
• Lastly, any premiums that you have already paid for your endowment plan will be lost. While the endowment plan may pay a surrender value and you can gain it from the new insurance coverage that you will buy, it sure is a significant risk.

It is often the case that an old endowment policy may be ill-fitted in your current financial plan. But make sure to look for a policy that offers better benefits and a cheaper premium. In this process, a life insurance calculator can come in handy.

Surrendering a policy is not a rare occurrence, but before taking such a drastic step, you should be well-informed of the consequences and take into factor your personal finance.