Policy surrender and tax implications

POSTED BY nsabhyankar ON January 31, 2013 9:10 am COMMENTS (8)

8 replies on this article “Policy surrender and tax implications”

  1. Ashal

    “…as you have already completed 5Y in both these traditional plans, the surrender amount now ‘ll be tax free. As the prem. was less than the 20% of sum assured so on that count too, the tax benefit already claimed by you in past years is in tact. ”

    the rules are the other way around.

    Surrender amt tax free if prem. is less than 20% SA and 80C deductions valid if surrendered after 5 years.

    1. Skinner80 says:

      Dear sir,

      I am 56 years old, retired from Air Force.
      I purchased Max Life life partner plus limited pay endowment age 75 Plan on 13 Jan 2009. I have paid premiums of approx 40,000/ per year till 2013. I wish to surrender this policy since I require the money now. I have not paid premium due on 13 Jan 2014.
      Can you let me know:
      1. Should I pay up the premium and then surrender the policy?
      2. I have paid 5 installments and was told by someone from Maxlife to pay one more installment before surrendering to get greater benefit. Is that true?

      Kindly advice.

  2. nsabhyankar@gmail.com says:

    Thanks Ashal, clear and sensible advice as usual from you!

    The policies have a provision of ‘extended term insurance’ wherin I can buy a term insurance using the surrender cash value. There are some conditions like the term cannot exceed the policy term and should be minimum of 5 years.

    Is this a reasonable option? I have to yet enquire at the Max Life office about this in detail, so can’t say how long a term the cash values can buy. Any thoughts or comments on this?

    Or is it preferable to go for a separate term insurance policy?

  3. Dear Abhyankar, as you have already completed 5Y in both these traditional plans, the surrender amount now ‘ll be tax free. As the prem. was less than the 20% of sum assured so on that count too, the tax benefit already claimed by you in past years is in tact.

    My take – please redeem your full money & invest in a lump sum & at the same time, start investing the saved prem. also.

    Please do purchase an adequate term cover for yourself, at least 15 times of your yly income.

    Thanks

    Ashal

  4. The surrender amount will be taxable since the premium (assuming it is annual) is more than 20% of the surrender amount

    See:

    http://elagaan.com/income-tax-blogs/what-you-must-know-about-tax-impact-surrender-insurance-policy

    For 30% tax you will loose about 15000. If this make you uncomfortable, make them paid up.
    The most important thing to do is to stop paying premiums and invest according to the time frame of your goals and your risk appetite.

  5. Dear Abhyankar, what’s your query?

    Thanks

    Ashal

    1. nsabhyankar@gmail.com says:

      I am not sure what happened to the text I entered! Sorry for the inconvenience, here is the query:
      I have two policies from Max New York all started in January 2008. I am in the grace period of premium payment due this year but am advised to surrender as these are not useful. I would like to know if it is better to surrender the policies or make them paid up and what would be the tax implications of the surrender. I have paid 5 annual premiums and 2013 completes 5 years counting 2009 as the first.
      Following are the policy details:
      1. Whole life participating, Modal premium: 10103, sum insured: 546735, premium due up to year 2084, surrender value: 18,774
      2. Life partner plus – limited pay endowment to age 75 (participating) 20 Pay Plan, Modal premium: 15155, sum insured: 225395, premium due up to year 2027, surrender value: 30,438

      Kindly let me know if any more details are needed for an informed decision.
      Thanks a lot

      1. My earlier reply is incorrect. If the premium is less than 20% of sum assured then the surrender value is tax free. I had understood it incorrectly. Sorry for the inconvenience.

        You could surrender them and invest them elsewhere for your goals depending on their time frame and your risk appetite.

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