Why You Shouldn’t Surrender Your Term Policy
What is meant by a term insurance policy?
Of the myriad of insurance options out on the market, a term insurance policy is probably the most affordable way to secure your loved ones. When you choose to buy term insurance online or offline, whomever you select as your nominee becomes eligible to receive a death benefit that can help them lead a stable lifestyle in your absence. Additionally, due to the lack of benefits on its maturity, pure term insurance also permits lower premium payments.
What does "surrendering" term insurance in India mean?
Surrendering term insurance simply means the amount policyholder will get from the life insurance company if they decide to exit the policy before maturity. Surrender is subject to policy terms and conditions. Any claims that are raised on a policy that has been surrendered are void, as the policy has now lapsed. Overall, it is recommended that one should never let their policy lapse to begin with by making timely term insurance premium payments. Although it has been repeated many times, the significance of renewing your policy cannot be overstated.
However, why is this recommendation touted so frequently?
To put it simply - once your policy lapses, it can lead to you losing all the benefits and coverage you had accrued earlier. This also included the benefit accrued from the waiting period.
Here are some more reasons why you should not surrender your term insurance in India –
1. No Benefits (Almost Always)
The point of pure term insurance in India is that there is no savings component attached to a term insurance policy. Instead, it is a pure life cover. Essentially the premiums you paid turn into a loss for you and your family when the policy matures.
If you opt to renew your term insurance policy wherein you continue paying your premiums, this extends your cover for premature death. Hence, in your absence, your family continues to remain assured that their financial well-being will be taken care of through your death benefit payout. Moreover, premium payments are also not too intense. Hence, it may not be a huge strain to pay your premiums regularly.
2. Taxes Benefits
The benefit afforded to all salary earners when they opt for term insurance is that, as per Section 80C of the Income Tax Act, 1961, a policyholder can avail of tax deduction worth ₹1.5 lakhs in premiums paid toward any of the term insurance plans in India, subject to provisions stated therein. When one chooses to surrender their policy, they can no longer accrue this benefit. The income tax deduction is no longer valid on a policy that has been surrendered, as that policy is now considered void.
Another tax benefit was that of Section 10 (10 D) of the Income Tax Act 1961, where any death benefits offered by the term insurance plan will also be tax-free, subject to provisions stated therein. However, when one surrenders a policy, they do not receive any death benefit. For this reason, it is recommended that one renew their policy rather than surrender it, as they can reduce their income tax liability.
3. Risk of Added Costs
In general, to assess one’s overall physical acuity, many of one’s current health and lifestyle factors — age, medical history, health, gender, drinking habits, smoking habits, etc. — are taken into consideration which could add to your term insurance premium cost.
The Bottom Line
You can avoid excess costs, and not miss the coverage you have built up if you choose to stick with your term plan rather than surrendering it. You also extend your term insurance tax benefits and ensure that your family remains secure financially. Hence, while purchasing a separate policy is always an option, it is not recommended if you have the convenience to renew your existing term plan.
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