If you are looking for or currently have endowment insurance, then chances are you have seen information regarding the surrender of your policy.When an individual surrenders their endowment policy, they cancel their contract before the end of the policy term and are paid out some portion of their policy’s value. Since a lot of endowment policies are long-term commitments and can get expensive over time, it is unsurprising that around 40,000 policies are surrendered each year. Here's what you should know if you are thinking of surrendering your endowment insurance policy.
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What Is Endowment Insurance
Endowment insurance is essentially a mix between a savings account and a life insurance policy. Individuals select what amount they would like to ‘save’ each month, and make their premium payments accordingly. As they make contributions, the size of the endowment grows, and once the policy reaches maturity, or the policyholder dies, they are then paid out the entirety of the endowment. There are many different types of endowment policies, ranging from traditional plans to endowment plans that help you save towards a particular goal like retirement or education. Some also offer annual cash payouts, which can be useful if you want additional income.
An additional way that an endowment insurance policy grows in value aside from monthly contributions, is from non-guaranteed returns (or bonuses) that are based on the performance of the insurer's fund. An endowment policy that provides cash value is called a participating policy. The Life Insurance Associations provides illustrated rates–currently 3.25% and 4.75%–that are estimates of long-term returns of a policy. While illustrated rates just represent an approximation, they give individuals an understanding of the value of their plan at the time of maturity (although in most cases your returns will be lower than the illustrated rate). Understanding your endowment insurance policy’s terms is essential before purchasing one.
What Happens When You Surrender An Endowment Policy?
When an individual stops paying premiums on their endowment policy, or cancels their plan before its maturity date, the insured is entitled to a sum of money that is a portion of the premiums paid. This lump sum is known as the 'surrender value'.
Your surrender value is dependent on what insurance provider you have, but generally there are two types of surrender values: the guaranteed surrender value and the non-guaranteed surrender value. To calculate your guaranteed surrender value, add up all of the premiums you have paid. However, it is very common for an insurer to only pay a portion of the total premiums you’ve paid since the start of your plan. Next, multiply the total premiums paid by the surrender value rate offered by your provider. Finally, add in any bonuses that may have been earned throughout the duration of your policy—this is the non-guaranteed surrender value.
How To Surrender An Endowment Policy
For most insurance providers, you must get into contact with their customer service in order to surrender your policy. Below are the general steps you must take:
- Contact your insurance provider’s customer service department
- Provide your personal credentials and account details for validation
- Fill out necessary documentation
- Submit documentation
It is also important to note that there may be associated fees that come with surrendering your plan. Check with your provider to make sure that you are considering all the costs before you make the decision to surrender your policy.
How to Save When Surrendering a Policy
There is a way for individuals to save money when they surrender their endowment policy. More specifically, they can sell their policy for more than what their surrender value is. There are different companies, such as Endowment Exchange that will purchase the policy and then sell it to an interested buyer.
The seller benefits from this as they are receiving more money for their policy than the insurance provider would have paid and are avoiding fees associated with terminating their plan. The buyer benefits from this as they are purchasing a plan with a shorter maturity date and potential for higher returns.
Should You Surrender Your Endowment Policy?
Overall, unless absolutely necessary, it is not in your best interest to surrender your endowment policy. Not only will you miss out on any potential gains, but in most cases you will forfeit a portion of the premiums that you’ve paid. If you find yourself struggling to pay your premiums, we recommend you get in contact with your insurer to see what other options are available.