Term insurance is a type of life insurance that provides a large sum of money to your beneficiaries in case of your untimely death during the policy term. It is one of the most affordable and simple forms of life insurance, as you can get high coverage at low premiums. For example, you can buy a 1 crore term insurance plan starting from as low as ₹ 384 monthly, depending on the insurer, your age and a few other factors.
However, some people may feel tempted to surrender their term insurance policy before the maturity date for various reasons. They may think they no longer need the life cover or want to save money on premiums, or they may have found a better alternative. But is it a wise decision to surrender your term insurance policy? Here, we will discuss the disadvantages of surrendering your term insurance policy and why you should avoid doing so.
1. You Will Lose The Life Cover
The most apparent drawback of surrendering your term insurance policy is that you will lose the life cover that it provides. That means if something happens to you after you surrender your policy, your family will not receive any financial support from the insurance company. You will leave them vulnerable to the uncertainties and hardships of life.
Think about the consequences of losing your income for your family. Without a term insurance policy, your family may face severe financial difficulties like existing loans, house expenses, and educational or medical expenses, in your absence. Therefore, you should not surrender your term insurance policy unless you have another stable source of income protection for your family.
2. You Will Lose The Tax Benefits
Another disadvantage of surrendering your term insurance policy is that you will lose the tax benefits that it offers. Term insurance premiums qualify for tax perks under Section 80C of the Income Tax Act 1961. That means you can scale down your taxable earnings by up to ₹ 1.5 lakh per year by paying term insurance premiums. This can help you save a significant amount of tax every year.
Moreover, the death benefit your nominees receive from the term insurance policy is exempted from tax under Section 10(10D). Your family will receive the assured sum without any deduction or liability. This can assist them in meeting their financial needs without any hassle.
3. You Will Lose The Future Benefits
A third disadvantage is that you will lose the term insurance benefits if you discontinue it prematurely. Term insurance policies only cover death, but also have various features and options that enhance their value and utility.
For instance, some term insurance policies offer a return of premium option, so you will get back all the premiums paid at the end of the policy term if you survive. This way, you can enjoy life cover and savings from your term insurance policy.
Some term insurance policies also offer critical illness cover, which means that you will get a lump sum amount if you are diagnosed with any of the mentioned critical illnesses during the policy term. This can help you cover the medical expenses and loss of income due to the illness.
Some term insurance policies also offer accidental death benefits, so you will get an additional sum assured if you die due to an accident during the policy term. This can provide extra financial security to your family in case of an unfortunate event.
4. You Will Face Higher Premiums In The Future
A fourth disadvantage of surrendering your term insurance policy is that you will face higher premiums in the future if you want to buy another term insurance policy later. Term insurance premiums depend on various factors, such as your age, health, lifestyle, occupation, etc. The younger and healthier you are, the cheaper your premiums.
However, as you grow older and face more health risks, your premiums will increase. If you surrender your term insurance policy now and buy another one later, you will have to pay more for the same coverage. You may also face difficulties in getting a term insurance policy if you develop any medical condition or habit that makes you a high-risk customer.
Conclusion
When you surrender your term insurance policy, you will lose all the term insurance benefits and face several disadvantages. This makes it important that you continue investing in a term policy that best suits your financial goals and also provides your family and loved ones with the financial cushion to secure their future in your absence.
