In simple words, Surrender Value is the specified portion of sum paid by the life insurance company when you as a policy holder decides to terminate a policy before its maturity.
Is there an emergency cash need that can only be fulfilled by surrendering your policy? Or maybe the policy you bought five years back is not as per your requirement? You are not sure if you can surrender the policy right now or are not sure about the charges that this surrender may incur? Before we answer your questions, it is important to understand the basics involved.
Surrender Value Meaning
Surrender Value in Insurance is the amount which insurance company will pay you, as a policyholder, when you decide to terminate the policy before the maturity.
There is often a misconception that it is not possible to surrender your term insurance. Contrarily, as per a directive issued by the Insurance and Regulatory Development Authority (IRDA), term plans in India provide the option to give up on your policy at any time. Occasionally, a surrender (discontinuance) charge might be levied upon the policyholder for premature surrender. However, these charges are not applied if the policy is renounced after five years.
After the policyholder has paid premiums consistently for three years, a regular premium policy acquires certain surrender value. Once you opt to exit the insurance policy, all the rights, benefits and interests linked with it, including the protection cover, will cease to exist.
Types of Policy Surrender Values
There are two types of surrender values – guaranteed surrender value and special surrender value. Let’s look at each of these values in detail!
1. Guaranteed Surrender Value – This is the value that is typically stated in the policy brochure/documentation. You are entitled to the sum if you have paid the premium for three years in a row. The sum is equivalent to all premiums paid up to this point, except the initial payment and any premiums for extra benefits or riders. Any bonus money you might be qualified for upon the plan's maturity will not be included in the surrender value of the policy. guaranteed surrender value is determined by multiplying the total premiums paid by the surrender value factor (the percentage of total premiums paid). When the insurance is close to its maturity period, the surrender value factor will be close to up to100% of premiums paid.
2. Special Surrender Value – The total sum assured, premium payments, policy term, and bonuses all affect the special surrender value of the plan.
In situations where the policyholder fails to make premium payments, but the plan remains in effect until they decide to surrender it, the special surrender value is determined. The sum insured may be lesser when premium payments end, and the lesser amount is referred to as the paid-up value.
Let’s consider an example. You take a policy with yearly premiums of INR 10,000 for a period of 10 years, and a sum assured of INR 2 lacs. After 4 years of premium payments, you decide to stop paying the premiums.
You Pay (Only 4 Premiums)
INR 10,000 per year x 4
Let’s calculate your paid-up value.
Paid-Up Value = Original Sum Assured x (No. of Premiums Paid / No. of Premiums Payable)
Paid-Up Value = 2,00,000 x (4/10)
Paid-Up Value = 2,00,000 (x2/5)
Paid-Up Value = INR 80,000
To calculate the special surrender value, you also need to know your surrender value factor. The number remains at 0 for the first three years. It then increases every subsequent year. Various companies decide their own surrender value factor. For example, if you stop paying premiums in/ from the fourth year, and we assume a surrender value factor of 30%. Additionally, in the four years, you earn a bonus of INR 30,000 Let’s use this information to calculate your special surrender value.
Special Surrender Value = (Paid-Up Value + Bonus) x Surrender Value Factor
Special Surrender Value = (80,000 + 30,000) x (30/100)
Special Surrender Value = 1,10,000 x (30/100)
Special Surrender Value = INR 33,000
Do All Policies Have a Surrender Value to Offer?
It is important to be careful and aware of the terms and conditionsif you decide to surrender a life insurance policy. For example, policies like term insurance plans do not provide any compensation or surrender value, if you decide to cancel a term insurance in the middle of their term. However, for insurance plans like Unit-Linked Insurance Plans (ULIPs) and Endowment Plans, you will receive a surrender value, provided you have paid your premiums for at least three years.
Aastha Mestry - Portfolio Manager
An Author and a Full-Time Portfolio Manager, Aastha has 6 years of experience working in the Insurance Industry with businesses globally. With a profound interest in traveling, Aastha also loves to blog in her free time.