Surrender Value in Life Insurance Policy

While thinking about purchasing a life insurance policy, most individuals tend to think about its benefits, including providing their loved ones with financial security, tax benefits, and saving. Among these advantages, the most overlooked factor is the surrender value. The knowledge of this term may be quite crucial for someone who wishes to take well-informed decisions in their insurance investment. We are going to read about surrender value in the life insurance policy, and how it is calculated with the various types and influencers of it.

What is Surrender Value?

The surrender value of a life insurance policy is the amount the policyholder receives if they decide to terminate the policy before its maturity date. In a way, it is the cash equivalent of the sum that can be obtained after a given period, less any charges or penalties applicable. That amount can serve as an emergency source of funds; however, a policyholder who surrenders will no longer have the protection of insurance coverage.

How Is Surrender Value Calculated?

The surrender value is not fixed but instead depends on many factors that include the type of policy, premium payments, and the duration for which the policy has been active. The general formula for calculation of surrender value is:

Surrender Value = Total Premiums Paid × Surrender Value Factor - Applicable Charges

The surrender value factor, as a percentage, would be determined by the insurer and usually would increase in relation to how long one has had a policy in place. Importantly, most policies will not create a surrender value until such time as one has made premium payments for a stated minimum number of years--usually two or three.

Types of Surrender Value

• Guaranteed Surrender Value
  This is the lowest amount the insurance company promises to give you if you surrender your policy. This is typically a percentage of the total amount of premium paid minus the first-year premium and other charges.
• Special Surrender Value
  Also referred to as non-guaranteed surrender value, this amount is greater than the guaranteed value. It depends on the decision of the insurance company taking into consideration market conditions, the policy bonus, and the corpus accrued.

Factors That Affect Surrender Value

A few things determine the surrender value of a life insurance policy.

• Policy Tenure
  The longer one holds the policy, the greater its surrender value is. In most cases, policies that are surrendered after the first years do not bring good returns.
• Premium Paying Period
  Constant premium payment over the period results in a greater surrender value.

Pros and Cons of Surrendering a Policy

Pros:

• Immediate Cash Outflow: Provides a one-time payment that one may use to meet emergency and sometimes other financial needs.
• Avoid Future Premiums: Surrender protects against future payments in case one cannot afford the premiums anymore.

Cons:

• Loss of Coverage: Cancellation of a policy results in loss of term life coverage.
• Economic Impairment: It is usually lower than the premiums paid, particularly in very early years, therefore surrender value is a great loss.
• Tax Parameters: Under certain conditions, the amount as received on surrender may fall under the purview of taxation.

Key Considerations Before Surrendering a Life Insurance Policy

Although surrendering may provide short-term liquidity, it could also have long-term effects on your financial planning and coverage. Before making a decision, several factors need to be weighed for it to be aligned with your goals. Here are some key considerations to have in mind:

1. Understand the Charges and Penalties
   The first things to review would include the surrender charges of your policy. Most insurance companies have a fee when a policy holder decides to terminate their contract before maturity. These are taken from the accumulated value of the policy, thereby reducing the amount you are likely to receive.
   Compare those charges to the benefits that will be realized by maintaining the policy. For example, if the policy has accrued substantial bonuses or is a source of future security, giving up the policy too early could mean the loss of a significant sum of money. Compare immediate cash needs to long-term value to make an intelligent decision.
2. Assess Your Need for Cash
   Determine how the surrender of the policy fits into your short-term and long-term goals for your finances. Do you have a short-term cash flow problem, or are there funds needed regularly? You'll get an immediate sum, but you will have given up the coverage and any future returns the policy could have provided.
   If the policy is for retirement planning or guaranteeing your family's security, then ask yourself if giving up would be in sync with your goals. Step away and analyze whether there could be an alternative solution that would better serve your financial needs without jeopardizing the benefits of the policy.
3. Seek Professional Advice
   Life insurance policies are very complex and not easy to understand. It would be wise to seek advice from a financial advisor or insurance expert to know what it entails to surrender your policy. They can analyze your financial situation, describe the consequences, and recommend other options that you may not have considered.
   An expert perspective is also able to enable a person to understand more vividly the implications that have a wide range and spread of the decision such as tax liabilities or future lost benefits. You can thus through them make a decision, which supports your long-and short-term financial welfare.
4. Explore Alternatives
   Before you actually surrender, check other available options that might meet your financial requirements and still hold the policy's benefits. Most life insurance policies are allowed partial withdrawal, allowing you to get a certain amount of cash without losing the entire policy. The other alternative is taking a loan from the cash value of the policy.
   These options can give you liquidity without having to give up the policy and the loss of coverage. Also, going back to your carrier and reviewing the terms under which you have the policy may uncover flexible solutions geared to your situation.

The surrender value of a life insurance policy is an essential concept that provides the owner with the flexibility to access the funds at a time when it is needed most. Still, surrendering a policy should not be taken as a decision easily made without careful consideration since it gives up future benefits and protection. Understanding how the surrender value works, its implications, and possible alternatives allow you to make an informed decision that matches your financial goals and circumstances in life. Always remember, an informed choice is the correct way to avoid economic problems in the future.