Should I Surrender Term Insurance Plan with No Liabilities?

A life insurance policy is important because it safeguards the financial interests of our family in the unfortunate event of one’s premature demise, accident, disability. When a family is bearing the emotional strain of the loss of a loved one, an insurance policy makes sure they don’t have to dive into a vortex of financial worries on top of this grief. Thus, there’s no denying the crucial role life insurance policy can play. One such type of the life insurance policy is the term plan.

What is term insurance?

A term plan is fundamentally a pure insurance plan. By that we mean that a term plan is entirely protection-based insurance plan that pays the beneficiary or the nominee of the policy the entire sum assured under the policy in the unfortunate event of the death of the policyholder. This payment is either made lump sum in entirety or paid in the form of monthly payouts - whatever the policyholder’s preference as stated in the policy document was.
As the name suggests, a term plan is a life insurance policy that provides coverage for a certain ‘term’ or period of time. The beneficiary gets the death benefit if the insured dies during this period specified in the term insurance policy. 

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It happens that you might want to surrender the term plan due to a solid reason - whether it is because there have been changes in the family, or if the insurance policy no longer serves your needs. You might find it better and wiser to exit the policy rather than paying a premium for a policy that does not serve your need. But sometimes you also ponder whether if it is wiser to surrender your term plan if it has incurred no liabilities. Remember, surrendering means you are withdrawing the financial security of your family. It has to be justified by the presence of a better policy. 

Surrender Value and the orchestration of surrendering term insurance

Let’s start with the basics and understand the terms - what is surrender value? As the name suggests, surrender value in insurance is the amount which the insurance company will pay to the policyholder if the policyholder decides to terminate the policy before its maturity date. But for a policy to render a surrender value, they need to have acquired it first, in accordance with the terms and conditions of the policy. This often means some time should have elapsed since the policy has been in operation. A life insurance policy is not primarily to serve you with returns; the main function is to safeguard the financial security of your family.

To understand the concept deeper, there are two types of surrender values: guaranteed surrender value and special surrender value. Guaranteed surrender value is 30% of the premiums paid, payable after the completion of 3 years, excluding premium for the first year and any additional premium paid for riders.

On the other hand, special surrender value is calculated as (Original sum assured * (No. of premiums paid/No. of premiums payable) + total bonus received) * surrender value factor
Now it is to be noted that surrendering an endowment policy is advisable when the received money can be invested in another product, generating higher returns than the original policy till completion of its tenure. The same is not true for term insurance. 

Point to Note

The term plans often come with a feature called the free-look period. If you are not convinced by the policy and decide to cancel it during this period, you will receive a full refund of your premium paid, with a nominal deduction. However, under other circumstances, it is important to understand that term insurance plans do not acquire a cash value. A standard term plans does not have any survival benefits unless the policy explicitly expands the scope. From that, it follows that you will not be paid a surrender benefit if you surrender the term insurance policy.