Life Surrender Values

Life Surrender Values

Life insurance is a long-term commitment. Premiums are payable usually for 10 years or more. Your money is invested to provide benefits in the future and the policy is not designed to be cashed in early.
There may well be other ways of raising the money you need rather than surrendering a valuable contract. Could you make use of any cash you already have in your bank, building society or National Savings account?
Surrendering a policy is a last resort; there are alternatives such as a loan on the policy or making it paid-up.
Your Policy is Valuable.


Loan

Your insurance company may be able to grant you a loan against the surrender value of your policy. The rate of interest is normally competitive.


Paid-up policy
 
Alternatively, you may be able to make the policy "paid-up". This means that although you stop paying premiums, you and your family can still enjoy the benefits of the policy in the future, although at a lower level.

Sell

You may be able to sell your policy for more than its surrender value. There are special policy auctions, and also specialist dealers. Not all policies are suitable for auction or sale. Check first with your financial adviser or specialist dealer.


Surrender

If you see no alternative but to surrender your life policy, you should first discuss the problem with your insurance company or financial adviser.
Always get a written quotation of the surrender value from the insurance company before you make a final decision.
Think twice if someone suggests you surrender a policy with one insurance company and take one out with another company. This is called "churning" and usually involves you in some financial loss on your existing policy (which would either have to be surrendered or made paid up).

If You Surrender

Your insurance company usually has to cover all the initial costs of issuing your policy. These costs include payment of commission, medical report expenses, office administration costs and other expenses connected with setting up the policy. These costs have to be met whether you keep up your policy for the full period or discontinue it after only a short time.
So, if you surrender your policy, the insurance company has to keep enough money from the premiums you have paid to cover all these costs. Allowance also has to be made for the cost of providing you with life cover for your full sum insured. This would have been payable in the event of your early death.
A surrender in the early years of the policy means you will get back a little or a lot less than the premiums you have paid. Very often, nothing at all is payable if you surrender the policy within the first year or so.


Surrender Values Can Change

Insurance companies plan ahead and arrange their finances on a long-term basis. Regardless of general economic conditions, they can then meet their commitments to policyholders. It is unusual for insurance companies to change surrender values frequently, but they must always take account of the market value of their long-term investments.


Points to Remember

If your policies were taken out before 14 March 1984, you may be paying your premiums less Life Assurance Premium Relief (LAPR). You lose this tax concession by surrendering a policy because LAPR is not obtainable on policies issued now.
Some contracts - term or temporary assurances such as family income benefit policies - do not as a rule have surrender values. This is because these are life policies without a savings element - they provide protection only. They can be compared to household or motor insurance policies which pay out only if a claim arises.
If your policy is intended to repay a loan - for example an endowment mortgage - you should not surrender it unless you have made other arrangements to repay the loan.
When taking out or changing a mortgage, it is usually in your interest to use your existing policies as backing for the new loan. A top-up policy may be required if the new mortgage is more than your previous one.
The cash value of policies linked to special funds (such as property or unit trusts) is dependent on the value of your holding in the fund at the time of surrender.
Insurance companies have financial responsibilities to all their policyholders. It is only fair to those who complete their contracts for those who surrender early to contribute to the costs involved in setting up their own policies.

Further Information

The important thing is to talk to your insurance company or financial adviser before making any decision.