The decision to buy life insurance can seem overwhelming. The idea is to financially protect your family if something happens to you. Most people choose life insurance when they have larger financial responsibilities or if they have people who are financially dependent on them.
But what if the situation changes? Can individuals exit their policy if they do not need the life cover?
Conversely, have you purchased a life insurance policy that doesn’t suit your needs? Are you planning to terminate the policy because it does not provide the features you were promised? So can you surrender your policy to the insurance company?
But are you aware of the surrender value associated with premature policy termination?
Surrender Value Meaning
Therefore, if you surrender the policy mid-term, you will get the amount allotted for savings and earnings (surrender value).
Additionally, surrender charges are also deducted from this amount, which varies from policy to policy.
The policyholder can choose the option to close the life insurance policy before the maturity date of the plan. If one chooses to surrender his policy midway through the term, he will not receive the entire maturity amount. Instead, they will receive a portion of the amount, referred to as the policy’s surrender value.
What is a Surrender Value
Surrender value is the amount a policyholder receives from the life insurer when he/she decides to terminate a policy before its maturity period.
Suppose the policyholder decides to surrender mid term; In that case, the amount allotted for earnings and savings will be provided to him. Surrender charges are deducted from it depending on the policy.
Facts about the surrender value of a policy
- Surrender value is available only for policies that have an investment component such as unit-linked insurance plans, endowments plans, etc., and not term plans or end-to-end insurance plans.
- When you surrender a policy, the insurance component no longer remains high, and the outstanding amount is paid after deducting the surrender charge, which is charged by the insurance company if the insurance policy is prematurely terminated.
- An insurance plan can be terminated for cash when you pay regular premiums for a specified period of time, usually 3 years.
- On surrendering the policy, you can no longer avail the tax benefits on premium payments.
- Two surrender values can be considered for making payment to the insured – Guaranteed Surrender Value and Special Surrender Value. Payment is usually made as per the surrender value which is higher or as per the policies of the insurer.
Types of Surrender Value
When you read your policy documents, you might come across two types of surrender value:
Guaranteed Surrender Value
The guaranteed surrender value amount is usually specified in the policy documents. If you have paid the premium for three consecutive years, you are eligible to receive the amount if you choose to surrender your policy.
This amount is equal to all the premiums paid so far, excluding the first premium amount and the premium amount for additional benefits or riders.
The surrender value will not include any bonus amount you may be eligible for on maturity of the plan.
Guaranteed surrender value is payable to the policyholder only after completion of three years. This constitutes only up to 30% of the premium paid for the Value Plan. Also, it does not include the premium paid for the first year, riders and additional costs paid for bonuses (you may have received).
“For example, suppose you have paid Rs 30,000 (Rs 10,000 per annum x 3) for a sum assured of Rs 3 lakh in the initial three years, you can get 30% of the minimum surrender value of Rs 20,000, Which is ₹ 6,000 (excluding first year’s premium).
Special Surrender Value
Special Surrender Value is calculated in cases where the policyholder stops paying premiums, but the plan continues until they opt to surrender it.
Once premium payments stop, the Sum Assured may reduce and the lower amount is known as the paid-up value.
You can calculate the sum by multiplying your Basic Sum Assured with the total number of premiums paid. Then you need to divide the amount by the total premium payable.
For example, you pay Rs.15,000 per year. You have Rs. 3,00,000. The sum assured is 20 years and the term of the policy is 20 years. You can stop paying the premium from the fourth year.
To understand this, first we have to know what is paid-up value. Let’s assume
If the policyholder stops paying the premium after a specific period, the policy will continue but at a lower sum assured, called the paid-up value.
Paid-up value is calculated as Basic Sum Assured multiplied by the quotient of the number of premiums paid and the number of premiums payable.
You get special surrender values when you discontinue your policy. And it is calculated by multiplying the paid-up value and the total bonus by the surrender value factor.
“Suppose you paid Rs 15,000 on a yearly basis for a sum assured of Rs 3 lakh for a policy term of 20 years. You stopped paying the premium from the fourth year onwards.
Here, let us assume the bonus is Rs 30,000 and the value factor is 30%; So the paid-up value will be equal to 60,000 and the special surrender value will be equal to {(60,000+30,000) x (30/100)}, which is Rs 27,000.
Do all life insurance policies provide surrender value?
You should be careful when you choose to surrender a life insurance policy. Policies like term plans, which do not provide any maturity benefit, do not have surrender value. If you choose to terminate these policies mid-term, you are not eligible to receive any kind of payment.
Life insurance policies like Unit-Linked Insurance Plans (ULIP) or Endowment Plans will provide you with surrender value as long as you have paid your premiums for at least three years.
What is surrender value fee?
Surrender value fee is the amount that your insurer will charge you when you decide to terminate your policy before the agreed date.
Another aspect of surrendering your life insurance plan is the surrender charge charged by the insurer when you cancel the policy or withdraw the funds prematurely. The value of surrender fee is high during the initial years, and it keeps decreasing as time goes on.
You may choose to surrender your policy as you may no longer need it or you may want to purchase a new one. It is an important decision, and you need to consider all the factors before making your choice.
Since the surrender fee may be a significant value to you, it is recommended that you ask the insurer if you can withdraw the cash surrender value and use part of it to purchase a less expensive policy, before you That you decide to surrender your current life insurance policy.
Know the difference between surrender value and cash value
Many people use the terms ‘surrender value’ and ‘cash value’ interchangeably. Unfortunately, it is not true. The cash value of your policy refers to the actual amount that your policy is worth as a direct result of the premiums paid and the returns earned on that amount.
Surrender value, on the other hand, refers to the amount you will receive if you prematurely terminate your policy. This is only a part of the actual cash value because the insurance company will not return the initial premium or any bonus.
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