From Tax Benefits to Tax Burdens: The Impact of Terminating a Life Insurance Policy Before 10 Years

Many people purchase life insurance not only for protection, but also for the “tax deduction privileges” that help them save money each year. However, what many may not realize is that if you decide to surrender or cancel your policy before 10 years, the benefits you once enjoyed may disappear completely and turn into a financial burden instead.

If the article is too long, you can choose a topic to read

• Why Keep the Policy for the Full 10 Years?
• Points to Note if You Terminate a Life Insurance Policy Before 10 Years
• Case Example of Early Termination of a Life Insurance Policy
• Frequently Asked Questions (FAQ)

Why Keep the Policy for the Full 10 Years?

Purchasing life insurance is not only about obtaining protection, but also serves as a financial planning tool linked to tax benefits. For this reason, the government requires that anyone wishing to claim tax deductions on life insurance premiums should hold the policy for at least 10 full years.

The reason for setting the requirement at 10 years is to encourage long-term savings, rather than paying premiums for just a few years and then cancelling midway. By maintaining the policy until maturity, you will receive “full benefits” in both aspects:

• Financial: You receive the full amount of tax deduction privileges based on the actual premiums paid each year, without having to worry about them being clawed back.
• Protection: Your family remains protected throughout the entire term of the policy. In the event of the unexpected, they will still receive compensation as specified in the policy.
• Savings: Once the policy reaches 10 years or more, the cash value and policy returns are usually higher than in the early years of premium payment, allowing your accumulated funds to grow further.

On the other hand, if you surrender or terminate the policy before 10 years, the tax deduction privileges you previously claimed will have to be fully repaid. In addition to losing tax benefits, you also forfeit the protection you have enjoyed throughout the contract.

Simply put, 10 years = full benefits / Less than 10 years = loss of privileges. That's why planning ahead to maintain your policy until maturity is so is important. This what makes life insurance for savings and tax deduction truly “worthwhile.”

Points to Note if You Terminate a Life Insurance Policy Before 10 Years

Many people may view surrendering or cancelling a life insurance policy midway as a way to receive a lump sum of money immediately. In reality, however, what you gain may come at the expense of losing multiple benefits—especially in terms of taxes and protection. When calculated carefully, it may turn out to be “a loss rather than a gain.” Let’s take a closer look at the disadvantages.

1. Coverage Ends Immediately

The moment you surrender the policy, your life insurance ends and all coverage that once protected you and your family disappears. If an unforeseen event occurs afterward, your family will not receive any compensation or benefits. In other words, you give up your vital “shield of protection” midway.

2. Repayment of Previously Saved Taxes

One of the main reasons people buy life insurance is to use the tax deduction privileges. If you surrender the policy before 10 years, all the deductions you previously claimed will immediately become void. You will have to repay all the tax savings you once enjoyed—sometimes amounting to hundreds of thousands of Baht over the years—turning into a large, unexpected burden.

3. Unexpected Additional Costs

It’s not only about paying back the taxes but you may also face additional costs such as interest or surcharges on the amount due. This can cause the repayment to exceed the total tax savings you initially enjoyed. What seemed like receiving a lump sum may instead turn into paying out even more.

4. The Cash Surrender Value Might Not Be Valuable

Even though the insurance company refunds a lump sum according to the surrender value table, once you take into account the taxes to be repaid, the lost protection, and additional expenses, that amount may not be sufficient to deliver real benefits. In the end, you lose both the financial privileges and the peace of mind that life insurance is meant to provide.

Case Example of Early Surrendering of a Life Insurance Policy

If you purchase a life insurance policy with annual premiums of 50,000 Baht for 6 years, a total of 300,000 Baht, and along the way claim tax deductions every year, you may have saved tens of thousands in taxes. However, if in year 6, you decide to surrender the policy and receive some benefits, what will actually happen is…

• You must repay the tax deduction privileges claimed over the full 6 years.
• Additional interest charges to be paid.
• Life insurance coverage ends immediately.

In the end, the amount you receive may not be sufficient to outweigh the burdens that follow.

In summary, surrendering or cancelling a life insurance policy before 10 years may cause you to lose more than you gain. You would have to repay the tax deduction privileges, lose all protection, and the refunded amount may not be worthwhile compared with the taxes to be repaid. Therefore, maintaining the policy until maturity is the most secure and valuable choice.

You can learn more about life insurance plans designed for savings and tax deductions here (Tax Landing).

For more information,

☑️ Call Tel. 1766, available 24/7

☑️ Contact a life insurance agent, KASIKORNBANK or Land and Houses Bank branches nationwide.

- Conditions are as specified by the Company’s and the banks.

- Premium is eligible for tax deduction. Conditions are as specified by the Revenue Department.

- Please study the details of coverage, conditions, and exclusions before making a decision to purchase insurance.

Frequently Asked Questions (FAQ)

1. What is a Policy Surrender?
It is the termination of a life insurance contract before maturity, where you receive a refund according to the policy conditions, but all coverage ends immediately.

2. What Do You Lose If You Surrender Before 10 Years?

• Loss of all tax deduction privileges previously claimed.
• Repayment of taxes plus additional charges.
• Termination of life insurance coverage.
  

3. Do You Have to Pay Tax on the Surrender Value Received?
In general, the surrender value does not need to be included as taxable income. However, the tax deduction privileges previously claimed must be repaid.

4. Why Do Some People Surrender Their Policy Midway?
In most cases, this results from liquidity problems, such as having other financial obligations or being unable to continue paying premiums.

5. If You Don’t Want to Surrender, Are There Other Options?

Yes. Options include reducing the sum assured, converting to a paid-up policy, extending the policy term, or taking a policy loan against the cash surrender value. These measures help maintain the contract and preserve your tax deduction privileges.