Most of the people who buy any Traditional Policies from LIC or private companies’ don’t know a bit about terms and conditions on exiting the policy much before maturity. A general belief is that they would at least get their paid up premiums back with some interest. But, they are literally shocked, when come to know that they would get peanuts or nothing from their policy if they discontinue their policy before maturity.
Surrendering of the policy
Surrender value is nothing but your future maturity value reduced to today’s value, so if the maturity value is Rs 5, 00,000 after 20 yrs and if you want it prematurely, company will pay you the Net present value as per today’s term.
Almost every traditional policy would have become minimum surrender value after continuous payment of premiums minimum 3 to 5 years. It means that you will get nothing back if you stop the payment of premiums before 3 to 5 years from the inception of policy as the case may be.
After 3 or 5 yrs, your surrender value would only get a small fraction of your total paid premiums that too excluding first year premium.
If you have a policy which has Sum assured of Rs. 5 lakh for 20 yrs term with Rs 25,000 premium per year. If you surrender your policy after paying 5 premiums (you paid Rs. 1,25,000 in 5 years), then you will get around 30%-40% of 4 premiums paid (first year premium is excluded), hence the total amount would works out to be only Rs 30,000 – Rs 40,000 only + proportionately reduced amount of accrued bonus if any (only because you have completed 5 yrs, else you will not get this also).
Paid up Policy
A lot of times when you have completed 3 yrs of policy, you might not want to get your money back immediately, in that case you can make your policy paid up (just stop paying premium and it becomes Paid up). When you do this, you can stop paying further premiums but you would get your total premiums paid + accrued bonus any at the end of its maturity period. This might works out better sometimes as compared to surrendering the policy if you were going to invest the proceeds in some debt instrument.
Conclusion
A lot of people intend to close their policies after completing 3 years as they think that they would get at least minimum surrender value after that. This is total emotional and irrational decision, because if you do math, you will see that surrendering the policy after 3 yrs is the worst decision if you have already realized not to continue with the policy.
Therefore, it is not advisable to discontinue the policy before to maturity and in rare cases; the option to surrendering the policy should be exercised.
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