Surrender: why you get less back in the early years

In short

In the early years the surrender value is usually low, because the costs of setting up and selling the policy weigh mostly on the start, and part of each premium pays for the cover. Before cancelling, ask about middle-ground options; cancelling also ends the cover.

• Find the table of illustrative surrender values in the policy documents.
• Ask in writing for the current surrender value and the options the policy allows.
• Write down the real reason you want to stop; the solution depends on it.
• Do not sign a cancellation on the same day you decide.

What the surrender value is

In a policy with a savings or investment part, some of each premium builds value. If you ask to end the policy before its term, the insurer pays you the surrender value: the value built up, less any surrender charge the terms set. Simple term protection policies usually have no surrender value, because the premium pays only for the cover.

Why you get less in the early years

Issuing a long-term policy has costs that are paid mostly at the start: medical and financial underwriting, issue, distribution. In many policies these costs are spread over the first years, or a smaller part of the first premiums is invested. On top of that, part of every premium has paid for the life cover you had all along. So if you stop early, the surrender value can be noticeably lower than the total of your premiums, or even nothing in the first years.

This is not a secret: the costs and the table of illustrative surrender values are in the documents you receive before you sign. They are often read in a hurry, though. It is worth looking at them again before you decide.

Before you cancel: the middle-ground options

Depending on the policy, there may be options that keep some of what you have built. Ask about each one if your policy allows it, and on what terms:

• Lower cover or a lower premium. A smaller sum insured or contribution, so the policy carries on at an amount you can manage.
• Making the policy paid-up. You stop paying, and the policy continues with reduced value or cover and no further premiums.
• A premium holiday. A pause for a set time; ask what happens to the cover and the charges meanwhile.
• A partial withdrawal. Some policies let you take part of the value and keep the rest.

Think about the cover too: if you cancel and later need life insurance again, you will be older and perhaps have a health condition, so it may cost more. If you plan to replace the policy, do not cancel it before the new one has been accepted and is in force.

Questions worth asking

• What is my surrender value today, and what would it be in one, three and five years if I carry on?
• Is there a surrender charge, and until when does it apply?
• Can I lower the cover, make the policy paid-up or pause payments? What do I lose in each case?
• If I cancel, what would new life cover cost at my age?

What you can do now

• Find the table of illustrative surrender values in your policy documents.
• Ask in writing for the current surrender value and the options the policy allows.
• Write down the real reason you want to stop: the amount, a need for cash, a change of goals. The solution depends on it.
• Do not sign a cancellation on the day you ask for it; give yourself a few days.

Every policy has its own terms. What we write here is general information, not advice; for your own case, what your policy says applies, and it is worth confirming it in writing with your insurer.

Read also: Reviewing your policies · I forgot to pay · How to read your annual statement

If you would like a second look, book an appointment with an advisor and bring your policy and your questions. You will go through them together, with no obligation.