A customer who wishes to terminate his insurance policy and recover its cash value before its maturity date is required to pay a fee called a surrender charge to the insurance company.
Reasons for Surrender Charges
For the customer, the levy of these charges is a disincentive for cancellation of the policy. For the insurance company, based on behavioural analysis of customers and empirical records, the charge provides an idea of the likelihood of policy cancellations.
Implications of surrender
- The Insurance Regulatory and Development Authority (IRDA) has advised insurance companies to refrain from levying surrender charges when the policy holder elects to terminate the policy after a period of 5 years or more;
- If a customer surrenders his policy after only 1 year, the maximum such charge is Rs.3,000/- for annual premium upto Rs.25,000/- and Rs.6,000/- for policies with annual premium > Rs.25,000/-;
- If the customer does not wish to continue payment of the premium, he could opt to have the policy converted to a paid up one. No further premium need be paid on such a policy and the investment remains intact at the frozen level;
- Apart from the charge, which is a monetary implication, the insurance cover for the policy holder will come to an end;
- The customer should opt to pay the charge and exit from a policy only if convinced that the policy is inappropriate for his requirement. Surrender charge generally benefits only the insurance company;
