Here, we will discuss about the surrender of endowment plans
We have been getting a lot of questions on the surrender of life insurance endowment plans
This possibly due to the difficult economic conditions that now exist all around
You will get to know the basis on which you will get life insurance plan surrender proceeds and provide you with the thumb rules
We will take some of the viewer questions but we will answer through a capsule of actionable information that will help answer all these and similar questions
Santosh R wants to know how much surrender value will he get in terms of percentage after 8 years for his 15-year endowment plan
He wants to know whether this is dependent on the plan and the life insurance company
Anup Kumar Saha says he surrendered an LIC endowment plan after 7 years and he wants to know whether the surrender value will be taxable
Ketan Rabadia asks whether he will get return of all premiums paid after the surrender of his endowment plan. He has paid all his premiums
Pradeep Kumar Mahato asks whether on surrender after 5 years, will he get full value
His premium paying term was 7 years and the policy term was of 14 years
First of all don't get yourself to a position when you have to consider a surrender of your life insurance plan
Before you buy the policy think hard whether you can keep paying the premiums regularly
Find out what the benefits you will get. Remember, you don't get high returns from endowment plans
As far as surrender of ULIPs are concerned, we are providing the links for the video in the description section of the video
Let's try to understand the concept of surrender value which is the money you get when you the surrender the policy
You pay premiums and from that money charges get deducted. This is your surrender value
Surrender value will be there if there is some cash value for the policy that happens after there is some positive value after adjusting for charges on the premiums paid
In pure protection plans like term plans, there is no cash value that gets accrued. Since they only provide life insurance protection, there is no investment portion which helps accumulate the cash value
The premium being paid in term plans is the charge for providing life insurance protection
So, whether it is endowment plan or ULIP, whichever plan has an investment element, will have the potential to have a cash value and can provide surrender value on premature exit
Now, if the endowment plan is of 10 years, then you need to pay premiums consecutively for two years for the plan to accumulate some surrender value
As you progress in the life insurance endowment policy term, the cash value or surrender value will keep increasing
The sooner you make the exit, lesser will be the cash value and the surrender value
If the endowment plan has a term of more than 10 years, you need to pay premium consecutively for three years to accumulate a cash value
Suppose you have stopped paying your regular premiums. You have to make it into a paid-up value policy to get surrender value and surrender proceeds
In a paid up value the paid premium is invested after adjusting for charges and the subsequent charges get deducted from that money too
Also, in the same proportion, the life insurance protection will get reduced
An example of calculating paid value is something like this. Suppose, you had to pay 10 premiums but you paid 3, therefore it is 30% of the life insurance coverage that you get.
For an initial coverage of Rs 1 lakh, you get a coverage of Rs 30,000
If you have been paying premiums regularly and you want to surrender the endowment policy, you get what is called Guaranteed Surrender Value or GSV
In the 3 year mark or thereabouts this is about 30% of premiums paid, going upto 40% in 4-7 year period and is 90% of premiums in the last two years
These are thumb rules. The actual surrender value amount will be determined by your policy document
You can also check with your life insurance advisor or take the help of your company
If it is a paid up value plan, it will then have a Special Surrender Value
This will be the amount made up by the paid up value + bonus and multiplied by what is known as the Surrender Factor
These aspects would be mentioned in your policy document which you can simply go through
You need to go through your policy document during the 15-day "Free Look Period" which most people don't
Now, let's take the tax aspects of surrender proceeds. Suppose you have availed of tax deductions and you surrender before 5 years, the tax deductions will be reversed and added to your income and taxed according to the relevant rates
So, if you surrender before 5 years, you get taxed for deductions availed and the maturity amount is taxable too
After 5 years in to the term, a surrender doesn't involve a reversal of tax deduction
The surrender value also becomes tax-free when the life insurance amount is 10 times of the premium or less
Instead of surrendering your endowment plan, check whether you can take a loan against your endowment policy
We will be doing a separate video and podcast on loan against life insurance policies
While we don't recommend loan against life insurance policy, however, it is a better option than surrender of an endowment plan