What Happens If I Surrender an ILP Early?

What happens when you surrender an ILP early?

Surrendering an investment-linked policy ends the policy. You receive the policy's current surrender value after any applicable charges or deductions, and the insurance coverage under that policy ends. Because an ILP's value is linked to its sub-funds and charges, the amount you receive may be less than the total premiums you have paid.

Regretting an ILP? What should you check before cancelling?

If you regret buying an ILP, avoid treating either immediate surrender or simply keeping the policy unchanged as an automatic answer. Start with the actual contract and current figures:

• Ask the insurer for the current surrender value and the date to which the quotation applies.
• Check any surrender charge, deduction or loading structure in the Product Highlights Sheet, Product Summary and Policy Contract.
• Confirm which insurance benefits would end or change if the policy is surrendered.
• Check the ongoing policy, insurance and fund-related charges that apply if the policy is retained.
• Ask what contractual options the policy provides, such as partial withdrawal, premium changes, reduced coverage or a premium holiday where available, and what consequences or charges each option may have.
• If replacing existing insurance is being considered, understand that a new policy can involve new underwriting, exclusions, waiting periods, premiums or other terms. Do not terminate existing cover solely on the assumption that replacement will be equivalent.

The purpose of this checklist is to understand the consequences before deciding. Whether surrendering, changing or retaining a specific ILP is appropriate depends on the policy terms and your circumstances. MoneySense states that financial-advisory recommendations should take into account the client's financial situation, particular needs and investment objectives, including the implications of early withdrawal or surrender.

How are ILP early surrender charges calculated?

There is no single standard penalty formula for every ILP. Check the Product Highlights Sheet, Product Summary and Policy Contract for the terms that apply to your policy. Depending on the product structure, the amount you receive can be affected by:

• the current value of the units in your policy;
• any surrender charge that applies during a stated period;
• the policy's premium-allocation structure and other deductions; and
• the unit price used when the surrender transaction is processed.

MoneySense explains that some back-end-loaded ILPs use surrender charges when a policy is surrendered partially or fully within a certain period. Other ILPs may have different charging structures, so the policy documents and an up-to-date surrender quotation are the correct place to check the actual amount.

What to check before surrendering

• Ask the insurer for the current surrender value in writing and the date to which it applies.
• Check whether a surrender charge or other deduction applies and where it is stated in the policy documents.
• Confirm which insurance benefits will end if you surrender the policy.
• If continued protection is important, understand the implications of ending existing cover before assuming equivalent protection can be obtained again on the same terms.
• If affordability is the concern, ask what contractual options the policy actually provides, such as changing premiums, reducing coverage, partial withdrawal or a premium holiday where available. These options are policy-specific and may have their own consequences or charges.

If affordability is the issue

Do not assume surrender is the only available action. Review the policy terms and speak with the insurer or your financial advisory representative before allowing a policy to lapse. Any alternative should be assessed against your actual policy terms, protection needs and financial circumstances.

The wider lesson

An ILP is a long-term insurance-and-investment commitment. Before buying, changing or exiting one, understand the policy's charges, liquidity, surrender terms, insurance consequences and the investment risk of its sub-funds. A personalised recommendation should only follow a proper assessment of your financial situation, particular needs and objectives.