Executive Summary – Insurance products can be surrendered. The surrender value is calculated based on premium, sum assured, number of premiums and bonus. Surrendering an insurance policy has tax implications like reversal of deductions claimed in the earlier years and adding the sum received on surrender to total income and pay tax as per the income tax slab rate under certain conditions.
Many of us purchase Life insurance. We buy life insurance to protect the financial interests of the family or to claim tax deduction. The policy has a sum assured that is given to the policyholder or nominees as per the stipulated terms and conditions. But the policyholder has an option to exit from the policy before maturity.
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In this case the insurer pays a sum to the policyholder. The amount paid by the insurer to the policyholder if the insurance policy is terminated before the maturity date is surrender value. In this case, the insurer deducts a surrender charge and gives the remaining amount to the policyholder.
The surrender value can be calculated in two ways –
Guaranteed Surrender Value (GSV) –
The surrender value can be calculated in two ways –
Guaranteed Surrender Value (GSV) –
GSV = 30% of the premiums paid minus first year premium
This is payable if the policy holder has paid the premium for last 3 years. Additional premium paid for riders etc. is excluded from the calculation.
Special/cash surrender value (SSV) –
SSV=(Sum Assured * (No. of Premiums Paid/Total Number of Premiums Payable) + Bonus)* Surrender Value Factor
The surrender value factor depends on age of policy, bonus and insurer’s terms and conditions.
Let us look at the taxation aspect of surrender value in different policies –
Life insurance –
If you surrender the policy before maturity, the taxability would depend on on payment of last 5 premiums on the policy. If you have paid, taxability would be nil. If not, the surrender value will be added to your total income for the year and taxed as per your applicable income tax slab rate
accordingly. If the life insurance policy is surrendered before completion of 5 years, deductions claimed under Section 80C for calculation of income tax in the preceding years will have to be reversed. The total claimed deductions will be added to the income for the year in which surrender value has been paid and taxed as per income tax slab rate.
If it is a single premium policy and the policy is in force for at east 2 years from the date of purchase and then you surrender it, you are not liable to pay any tax.
Let us look at the taxation aspect of surrender value in different policies –
Life insurance –
If you surrender the policy before maturity, the taxability would depend on on payment of last 5 premiums on the policy. If you have paid, taxability would be nil. If not, the surrender value will be added to your total income for the year and taxed as per your applicable income tax slab rate
accordingly. If the life insurance policy is surrendered before completion of 5 years, deductions claimed under Section 80C for calculation of income tax in the preceding years will have to be reversed. The total claimed deductions will be added to the income for the year in which surrender value has been paid and taxed as per income tax slab rate.
If it is a single premium policy and the policy is in force for at east 2 years from the date of purchase and then you surrender it, you are not liable to pay any tax.
ULIPs –
If you surrender the policy before maturity, the taxability would depend on whether you have paid 5 premiums on the policy or not. If you have paid so, taxability would be nil. Else, the surrender value will be added to your total income for the year and taxed accordingly.
Pension Plans –
In case of PENSION plans, if you surrender before maturity, the entire surrender value is taxable at your current income tax bracket rate. It is also necessary to purchase an annuity with 2/3rd of the surrender value. The premiums that you may have claimed as deduction under section 80C for filing taxes will have to be reversed. They will be added to the current income and you will have to pay tax on it.
If you surrender the policy before maturity, the taxability would depend on whether you have paid 5 premiums on the policy or not. If you have paid so, taxability would be nil. Else, the surrender value will be added to your total income for the year and taxed accordingly.
Pension Plans –
In case of PENSION plans, if you surrender before maturity, the entire surrender value is taxable at your current income tax bracket rate. It is also necessary to purchase an annuity with 2/3rd of the surrender value. The premiums that you may have claimed as deduction under section 80C for filing taxes will have to be reversed. They will be added to the current income and you will have to pay tax on it.
It is better to surrender bad insurance products from your portfolio. But be aware of the tax implications of the same.
Process of Surrendering a Policy – Every insurer has its own process of surrendering a policy. Usually the documents to be submitted are the policy surrender form, policy document, self attested copy of ID proof and bank statement/cancelled cheque. For example, if you have a policy from LIC or Aviva, you need to go to a branch to get a surrender form and submit it along with the other documents. For surrendering a policy from ICICI, you need to fill a payout request form that can be downloaded from the website and submit it along with the other required documents.
Insurance is a must in your financial plan. But if the insurance is through a bad product or you are over insured, it might be better to surrender the insurance policy even at a loss. Do make sure that you are insured appropriately.
Insurance is a must in your financial plan. But if the insurance is through a bad product or you are over insured, it might be better to surrender the insurance policy even at a loss. Do make sure that you are insured appropriately.
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