Thinking of Closing Your Life Insurance Policy

Ashok visited 43-year-old Rajeev who was all set to terminate his endowment life insurance policy earlier than maturity. Ashok’s visit was most favorable. He changed Rajeev’s mind about surrendering his life insurance policy, otherwise, he would have rued the decision for the rest of his life.

This was because, soon after his decision to continue the policy, Rajeev met with an accident. He was forced to take a sabbatical, resulting in a loss of pay. It was during this time, that a pay-out from Rajeev’s endowment policy came in and helped his family meet their expenses for three months.

If you surrender or close a life insurance policy before maturity exposes you and your dependents to the uncertainties of life. It can put at risk your financial goals and life’s journey can be a tightrope walk. Here’s why you should think twice before discontinuing a life insurance policy.

Life insurance is a cushion that protects your family and dependents from the uncertainties, exigencies, and unpleasant surprises thrown by life. When you continue your policy until it matures, you are prepared to deal with most emergencies. Even in case of your ill-timed demise, the sum assured received in the form of a lump sum or the monthly pay-outs can help your family members stay financially independent.

Closing an endowment policy before maturity can also hinder your long-term financial goals like the down payment for a new house, buying a car, your children’s higher education, their marriage or even your retirement corpus. Continuing your policy till maturity provides you continued life cover and help you address diverse needs at various stages of life.

Tax benefits offered by life insurance policies are one of the most convenient and long-term ways to save tax. Premiums paid towards life insurance policy are exempt from Income Tax under section 80C of the Income Tax Act.

Additionally, life insurance policies such as endowment plan also pay the policyholders, loyalty bonuses in the form of regular pay-outs or the lump sum when the policy matures. When you decide to terminate your life insurance policy before maturity, your insurer levies the applicable charges on the paid-up value, thereby reducing the total surrender value. Note that you are eligible to receive guaranteed surrender value only if you have paid premiums for at least three years.

For most life insurance policies, the charges levied by the insurer reduce as the policy ages. Hence, discontinuing a policy after the first few years is to your disadvantage, because you have already paid the major charges. If you continue, the future premiums would attract lesser charges, and the savings would be more which means that your corpus would be higher.

It can be seen, there are several flip sides to surrender your life insurance policy before maturity. Not only do you expose yourself and your family to financial risks and uncertainties, but also devoid yourself of various benefits. Most essentially, you leave a good decision of securing the future of your family incomplete; So take a wise decision and think twice before surrendering your policy.