To Surrender, or Not to Surrender Your Endowment Plan

There can be times when policyholder can opt for surrendering the endowment policy. There can be numerous reasons for surrendering the policy. Maybe you bought a wrong policy or you might have found a better tax saving instrument or are unable to pay the premium due to financial distress. Whatever the reason we would be discussing the options before you.

Endowment plans offer savings and insurance benefits to the policyholder. In event of policyholder deciding to terminate the endowment policy, the insurance company would levy closure charges before the company refunds your money. You are definitely eligible for Guaranteed Surrender Value. We would also discuss terms including Guaranteed Surrender Value, Special Surrender Value, Paid Up Value and the whether surrendering the plan would be advisable or not.

Surrender value is the money the insurance company gives when you surrender the policy. Surrender Value is applicable in case where the policyholder has paid three full years premium. Three factors determine surrender value.

Number of premiums paid as a percentage of the total number of premiums payable over term of policy.
Sum Assured of the policy
A multiplier called Surrender Value Factor.

Now let’s discuss including Guaranteed Surrender Value and Special Surrender Value.

Guaranteed Surrender Value: It is calculated as 30% of all the premiums paid excluding the first year premium provide policy has been in force for three years.

Special Surrender Value: Paid up value which is discounted by the surrender value factor. The formula for calculation is

Surrender Value = [{(Number of premiums paid / Number of premiums payable) X Sum Assured} + Accumulated Bonus] X Surrender Value Factor.

Example of Surrender Value Calculation:

Let us assume the policyholder had got endowment policy and has taken sum assured of Rs 5, 00 ,000 and pays an annual premium of 30, 000. Policyholder wants to surrender the policy after paying premiums for 5 years. The insurance company has paid annual bonus rate of Rs 48 per 1, 000 of sum assured since the policy has been in force. Applicable Surrender value factor is 30% as per LIC table.

Guaranteed Sum Assured Calculation:

Guaranteed Surrender Value= Rs 30, 000 *4 *30% = Rs 36, 000

Special Surrender Value= ((5/20*5, 00, 000) + (48*(5, 00, 000/1000))) * 30% = Rs 66, 432

Since the Special surrender value is more than guaranteed surrender value, policyholder will receive special surrender value, if policyholder surrenders after 5 years. Please note that over a period of 5 years the policyholder pays Rs 1, 50, 000.

Before Surrendering Endowment Policy Please Make a Note of This:

Insurance Cover Ceases: Insurance cover ceases the moment policyholder decides to terminate his/her endowment policy.
Tax Benefits: The policyholder will not be able to avail tax benefits under Section 80C of the Income Tax Act as soon as he discontinues the premium.
Better Return?: It would make sense for the policyholder to discontinue with the endowment policy only if he/she is able to get better returns from other financial instruments. One needs to factor in the amount lost due to surrender and the lost tax benefits.
Paid Up Value: After paying premiums regularly for three years the policyholder has option of not paying any further premiums but continue with the endowment policy till the maturity of the policy.

Paid up Value of Sum Assured = (Number of premiums paid / Number of premiums payable) X Sum Assured.

If the policyholder decides to terminate the endowment plan, it is advisable to get an independent decision and to take all the factors into consideration. One should consult the insurance agent or the financial planner before coming to a final decision. The objective of this article is to bring forward the disadvantages of terminating endowment plan prematurely. It is in no way a recommendation to continue with your current plan and should not be treated as one.