Surrender Policy

Surrender value of a life insurance policy

As the name itself reveals, surrender value of a life insurance policy is the value you receive from the life insurance company when you surrender the policy before the maturity of the policy. Loosely defined, the word surrender can mean cancelling or terminating the policy or simply returning it to the insurance company before the tenure has been completed or before the policy matures.

The money so received at the time you discontinue the policy is called surrender value.

Surrender charges are deducted based on the terms of the plan. Surrender values typically are paid only after a policy has been active for a specified period of time, usually three to five years

Amounts payable after completion of 3 years are usually stated in the policy document . A sum is calculated by adding all premiums paid throughout the policy period, excluding first-year premiums. It also excludes any additional premiums paid for riders and any bonuses you may have been eligible to receive at maturity. The Guaranteed Surrender Value is the product of the total premiums paid and the surrender value factor (% of total premiums paid).

Another point to note is that the insurance regulator, IRDA has asked that there be no surrender charges if the policy is surrendered after 5 years.

Paid-Up value of a life insurance policy

The insurance company provides you with an option wherein they will let the policy continue to its maturity with no premium expectation from you – the caveat is that the sum assured that was in existence when the policy was taken will now be reduced substantially. This is done by making the policy paid-up.

So, when you make a policy paid-up, it still is in force with a reduced sum assured and does not discontinue. The reduced sum assured is called the paid-up value of the policy.

Formula for Paid-up:

Paid-Up Value = (Number of premiums paid / Total number of premiums payable) * Original sum assured

What option should you take ?

As mentioned above, by choosing the reduced paid-up option, your life insurance coverage continues even after you stop paying premiums. However, choosing to surrender the policy would mean that all the past paid premiums would get forfeited, and your policy life cover would end.

If you want to curb your expenses but still want to retain your life insurance policy, then the reduced paid-up option is good for you instead of surrendering the policy. This way, your beneficiaries will have an assurance that they will get death benefits in your absence. Reduced paid-up option will also help to avoid surrender charges.

On the same side, if you make it paid-up, then you will get the money only after the tenure is over which might be too late in the day for you. With the inflation monster, that money might look a little for you by the time you get it as its purchasing power should have been lowered by then.

So, the decisions of which way to go is very very subjective so do not blindly make a decision – do your planning and depending on your own personal factors, take the right call with your advisor on what makes sense for you.