Life is unpredictable, and nobody knows what it has in store for people in the future. The untimely demise of the sole breadwinner of the family or a huge amount of unexpected expenses might leave a person’s family with a huge financial burden. Therefore, it becomes important for a person to have a life insurance policy that will protect the family from financial losses that may arise after he or she is not with them.
Many people consider purchasing a life insurance policy as a waste of money, while others consider it to be just a luxury rather than a requirement. They don’t understand that these life insurance policies can be of huge advantage for their loved ones when they are not around with them.
There are times when the policyholder may think of cancelling or surrendering his or her life insurance policy due to the inability to pay premiums following financial constraints, or they might start thinking that these policies are not worth spending money on.
It is important to ponder over the decision thoroughly as cancelling or surrendering the life insurance policy will not provide any cash value to the policyholder.
Why not to cancel a Life Insurance Plan?
Given below are the 5 essential reasons that will make the insured person understood why it is not a good idea to cancel or surrender the life insurance policy.
Taking care of the family’s future financial requirements
If the policyholder is the sole earner of the family, then his or her spouse, children, and elderly parents will be completely dependent on their savings when it comes to financial requirements, even after the breadwinner’s untimely death. Once the policyholder is gone, the regular income also gets adversely affected. As a result, the family will be forced to live a compromised life.
This is where life insurance policy comes to rescue. The family will get a sum assured by the insurance providers that will offer not only financial protection but also financial stability to the family during an unfortunate loss of income.
Whether it is children’s education, children’s marriage, or for any other family requirement, it works as a replacement of income. If the policyholder cancels the life insurance policy in the middle of the policy term, his or her family will not get any of the benefits attached to it.
When the policyholder surrenders the life insurance policy, he or she gives up their ownership rights on the assets of the policy forever, which means that the insurance provider will no longer be bound to pay the death benefit attached to the policy.
The policyholder will also not be able to take up the policy again from the point where he or she had left it because they do not possess any reinstatement right.
Cancellation or surrender charges may adversely affect finances
Whenever a person plans to cut short the expenditure, the first thing that comes to his or her mind is to give up the premium paid for a life insurance policy. They start thinking of giving up the premium payment by cancelling the life insurance policy for a brief period.
If the policyholder surrenders the insurance policy, then the insurance provider will only give the cash surrender value to him or her by cheque.
The amount of money that the policyholder gets when he or she cancels or surrenders life insurance policy, depends on various factors, including the prevailing situation at that time, e.g., For how long has the policy been active?, What amount has the policyholder already paid by way of premiums, how has the policy grown and what amount of cash value has been used up?
According to law, the insurance providers have to give a 15 day free look period to the policyholder since the policy’s inception. If the policyholder wishes to cancel the life insurance policy during that period, he or she will be entitled to get a refund.
However, if the policyholder decides to cancel the policy after surpassing the free look period, the insurance provider will attach surrender or cancellation charges to it that may turn out to an extra financial burden.
If the policyholder cancels the policy in the first year of the inception, the insurance provider writes off the premium towards surrender charges.
If the insured cancels or surrenders life insurance plans like money back plans, endowment plans, unit-linked insurance or whole life insurance plans in the middle of the term of the policy, he or she will not be able to enjoy the benefits of cash value growth. The cancellation will also lead to several charges like surrender charges and additional taxes.
The surrender value that the policyholder will get will be low due to taxes and charges levied on cancelling the policy.
Save income tax money
The insurance premium that the insured person pays towards life insurance policy every year is eligible for deduction under Section 80C of the Indian Income Tax Act, 1961. If the policyholder cancels the life insurance policy, he or she will not be paying any premiums for the policy in the future. He or she will not get life cover from the insurance provider.
Hence, if he or she surrenders the policy, they will lose out on tax benefits they were getting.
Life insurance plans like ULIPs and endowment policies offer tax benefits compared to other investment options. If the policyholder decides not to pay the premium in the middle of the policy term and cancel it, the policy may not give them favourable tax benefits.
Purchasing a new life insurance policy can be more expensive
If the policyholder surrenders or cancels the life insurance policy, he or she will lose out on the coverage they have purchased. Sometimes a policyholder may decide to temporarily cancel the policy only to purchase a new one later. However, if he or she decides to purchase the same life cover in the future, it may turn out to be more expensive than the previous policy as the cost of insurance increases with the increasing age.
Moreover, if the policyholder is diagnosed with an unexpected illness, he or she may not be able to benefit from some of the coverage benefits.
If any person decides to repurchase life insurance after canceling the first one, they will have to apply for a new policy. They will have to go to all the formalities again.
No matter if the policyholder is as healthy as he was during the term of the first policy, new rates will be applicable that may be higher because the person has aged. This means the policyholder will have to pay more to avail the same benefits.
If the person has developed a health condition by any chance, it will also cause policy rates to go up.
Whole life insurance policy promises to perform better over the period as they keep earning compound interest annually. Hence, giving up whole life policy for a new policy will withhold you from availing the benefits of the accelerated growth that comes in conjunction with the policy.
Premium paid on term insurance will not be returned
If a policyholder cancels the term insurance plan in the middle of the policy period, the amount of premium that he or she has paid over the years will not be paid back. The insured person will not even get any cash refund if the life insurance policy is cancelled or he or she lets it lapse.
Let’s discuss some of the most common questions asked:
Q1. How can an insured person cancel an insurance policy?
A1. The procedure of cancelling life insurance policy varies according to the type of insurance policy that he or she has. The insured person can cancel the policy during the free-look period, which is 15-30 days after the inception of the policy. However, if they cancel it after that, some charges will be levied.
The insured person can either stop paying the premium or write a letter to the insurance provider to cancel the policy.
Q2. Will the policyholder get a refund after cancelling the policy?
A2. The policyholder can get a complete or partial refund depending upon the type of policy he or she has purchased.
You May Also Like: Investment