When to get cash surrender value from life insurance policies

GENERALLY, when an insurance policyholder defaults in the payment of an insurance premium, his policy might lapse or may be canceled by the insurance company. But if the nonpayment is only accidental, for instance the insured meant to pay but had only forgotten to do so, the insured may take advantage of the grace period (usually 30 days), which is provided in most policies. As such, the policy need not lapse.

Other types of life insurance policies also give out dividends, which can also be used to offset unpaid premium payment. There are policies as well that are equipped with riders, which allow waivers of premium payments in case of disability or unemployment.

However, there are cases when the insured was not able to pay on time because he cannot actually afford to continue to pay the premium anymore. There may be several reasons for this such as liquidity issues and other financial problems. For instance, nowadays, many people might be struggling to make ends meet and to pay even their most basic needs as the coronavirus pandemic continues to batter global and local economies leading to loss of jobs and reduction in or total loss of incomes.

If the policyholder defaults on payment or eventually decides to surrender the policy, generally, the policy may lapse as stipulated. Also, a life insurance policy is basically a contract between two parties, the insured and the insurance company; as such, the non- performance of the other party’s obligation, such as the payment of premium as agreed, may result in its eventual cancellation.

When a policyholder cancels his life insurance policy, will he get back some money he paid to the insurance company?

The answer may depend on a variety of factors. For instance, if the policy has accumulated enough cash value, even if he defaults or is suddenly unable to continue with the premium payments, he may still receive some amount of money from the insurance.

The cash value in a life insurance policy depends on the premium paid to the policy. Some of the premium goes to the death benefit protection, some are used to cover the fees and administration costs, and the remainder is deposited to the cash value of the account.

Thus, the amount of cash value to be received upon surrender of the policy depends highly on the length of time that the policyholder has been paying the premium. The longer your policy remains intact and supported by consistent premium payments, the higher will be the cash value. Interest, dividends and capital gains that have been earned by the cash value in the policy also play a role. Furthermore, there are cash surrender fees and charges that may be applied by the insurance company.

This is guaranteed by Republic Act (RA) 10607, or the Insurance Code of the Philippines, which requires that insurance policy forms should include a provision specifying the options to which the policyholder is entitled to in the event of default in a premium payment after three full annual premiums shall have been paid. (Section 233[f] [1] of RA 10607)

One of the options is the “cash surrender which will be paid to the policyholder upon the surrender of the policy. The law states that cash surrender value should not be less than the reserve on the policy, the basis of which shall be indicated, for the current policy year and any dividend additions thereto, reduced by a surrender charge which shall not be more than one-fifth of the entire reserve or 2.5 percent of the amount insured and any dividend additions thereto.

The important thing to remember when getting some money back upon surrender of the policy is that the policyholder must have paid the premium in full in the previous three years.

Also, note that the cash surrender value may not be equivalent to the accumulated premium payment made in the previous years, which the policyholder may be expecting to get. The amount to be received upon surrender of the policy may be reduced by surrender charges or other penalty imposed for the early withdrawal of cash from a policy. Surrender charges are imposed to recoup the expenses incurred by the insurance company, such as the agents’ commission.

Lastly, it is worth noting that the cash surrender value may only be applicable to some forms of life insurance such as whole life policies and universal life policies. The former pays out dividends, which can be used to augment the cash value while the latter pays an interest rate that may be applied to the cash value. Variable life insurance policies may grow their cash values in mutual fund subaccounts. However, cash surrender value and values may not be found in any type of term life insurance because they only provide pure death benefit protection.