A surrender charge may be deducted for premature encashment of units, either partial or full. This charge is usually calculated as a percentage of the fund or of the annualised premiums.IRDA has laid down guidelines on the maximum surrender charges that can be levied by life insurance companies. The surrender charge or the discontinuance charge shall not exceed 50 basis points per annum on the unit fund value and no other charge apart from this shall be levied by the insurer on surrender of the policy.Having understood these charges, what you also need to understand is that IRDA has set guidelines to limit the impact of these charges on the overall return from the investible portion of your premium.From the completion of the fifth year – which is the lock-in period, the cost needs to be spread over the period in such a way that the difference between gross yield (what the plan would have earned if no charges were deducted) and net yield (what the plan earns after deduction of charges) should not exceed more than that mentioned in the table below.
|Number of years elapsed since inception
||Maximum reduction in yield*
|11 and 12
|13 and 14
* Difference between gross and net yield in term of percent per annum
For example, if you hold the policy for 10 years and if the investments in your policy's stock bucket have reaped 15% return, you should get at least 12% (maximum permissible charges are 3%) at the 10th policy anniversary. This ensures that the difference between the gross yield and the net yield is not huge.