Recently, the Insurance Regulatory and Development Authority of India (Irdai) released a new regulation on the surrender value of life insurance policies. This new regulation was released after many revisions and it was announced on Wednesday. IRDAI stated that the facility of a policy loan is compulsory for life insurance products. The new regulation says that insurers can settle their claim within 7 days, whereas surveyors can submit their report within 15 days.Â
People are not familiar with insurance surrender policies and insurance surrender values, then know about them-
What is Insurance Surrender Value?
Insurance Surrender Value is the amount of money an insurance company pays to the policyholder when he/she decides to cancel the policy before it matures. The final amount is calculated based on the premiums they have paid and the time they have held the policy. This concept applies primarily to life insurance policies with a savings component, such as whole life insurance, endowment policies, and universal life insurance.
How is the Surrender Value Calculated?
To calculate the Surrender Value, there are several factors included-
- Accumulated Premiums: A part of the premiums paid by the policyholder. It has been allocated towards the policy’s savings or investment component.
- Bonuses and Dividends: It is declared by the insurance company and added to the policy’s cash value.
- Interest Earned: The interest value earned on the paid amount on the policy.
- Surrender Charges: Fees deducted by the insurance company for early termination of the policy. These charges are typically higher in the early years of the policy and decrease over time
Formula to calculate the surrender value:-
- Surrender Value=Accumulated Premiums+Bonuses and Interest−Surrender Charges
Types of Surrender Values
There are two types of Surrender Values- Guaranteed Surrender Value and special Surrender Value.
- Guaranteed Surrender Value: It is the minimum amount paid by the insurance company. The insurance company guarantees to pay if the policy is surrendered. It has a fixed percentage of the total premiums paid and is already defined in the policy document. For example, it goes to 30% of the total premiums paid after the first three years.
- Special Surrender Value: It is higher than the Guaranteed Surrender Value. It does not have a fixed percentage, it is based on the policy’s performance, duration, and other factors. Insurance companies decide it at the time of Surrendering policies.
Points to note when cancelling your Policies
There are a few things to keep in mind when cancelling your life insurance policy and receiving the surrender value. We will explain each of them in detail.
Check the cancellation refund amount: Make sure to verify the surrender value amount before cancelling your life insurance policy. The policy documents usually include information about the surrender value’s amount. You can inquire with the insurance provider as well. It could be a good idea to monitor changes in the surrender value of your insurance policy over time, even if you have no immediate plans to cancel. For instance, you can cancel your policy at that point and use the surrender value to remodel your house if you know when you will receive a value that surpasses the total amount of premiums you have paid.
You will be subject to taxes if you profit from the surrender value: Please be aware that you will have made a profit and will be subject to income tax as a lump-sum income if the surrender value you receive is greater than the total amount of insurance premiums you have paid. The amount of lump-sum income is what remains after deducting the unique lump-sum income deduction from the surrender value you were given, as well as the entire amount of insurance premiums you have paid. However, after subtracting the amount that will be taxable will be half of the remaining amount. Please be aware that additional lump-sum income as well as the surrender value are included in the amount subject to this special lump-sum income deduction. For instance, the profit is 750,000 if the surrender value is 5.75 million, the refund rate is 115%, and the total amount of premiums paid is 5 million. The taxable income is half of this amount, less 500,000, or 125,000. In theory, you must file a tax return if you have taxable income; but, if you are self-employed and your lump sum income is less than 200,000, you are exempt from filing a tax return.
Gift tax may be applied instead of income tax if the individual who received the surrender value is not the same as the person who paid the insurance premium. If your taxes are due in the calendar year, gift tax will be applied to the surrender value less the 1.1 million basic deduction.
Three strategies to increase the value of your surrender
Getting the maximum amount of surrender value is always preferable. There are a few things to consider to do this.
Enrol when you’re still young: In general, your return rate will be lower the older you are when you join. Your return rate will therefore rise if you join early and pay for a longer duration of time.
Reduce the duration of the premium payment: Reducing the duration of the premium payment is an additional choice. For instance, the return rate will be better if you set the premium payment period to 60 or 65 years old as opposed to paying for the duration of your life. But note that you will pay a higher monthly premium if you decrease the payment time.
Consult an Expert: When purchasing insurance, there are many points to consider, such as the surrender value, the necessary coverage, and the insurance premium. If you want the coverage and premium that suits you and want the maximum surrender value, the quickest way is to consult with an expert. If you are considering whether or not you should cancel your current insurance, we recommend consulting a professional.