Surrender Value in Life Insurance: Overview
A life insurance plan is a long-term investment and commitment for policyholders. Due to certain circumstances, policyholders are sometimes unable to continue their life insurance plan and have to surrender the policy, which means terminating it before it reaches maturity. If a policyholder opts to surrender their life insurance policy, the life insurance provider offers a surrender value at the time of surrender. In this article, we will discuss how life insurance surrender value is calculated, its types, and which kinds of policies can be surrendered before maturity.
Surrender Value: Definition
In insurance terms, a surrender value denotes the amount an insurance company will pay you, as a policyholder, when you decide to surrender your life insurance policy. There is a common misconception among customers before purchasing a policy that they will be stuck with their life insurance policy forever once purchased. However, as per IRDAI, life insurance plans in India offer you the option of surrendering your policy. The charges imposed while surrendering a policy may vary depending on your policy.
Should anyone choose to surrender their policy midway through the policy term, they will not receive the maturity amount. Instead, they will receive a portion of the sum assured, which is referred to as the surrender value of the policy. From the 3rd year after the commencement of the policy, the surrender value is up to 30% of the paid premium and increases subsequently after the third year.
Types of Policy Surrender Value
There are two types of surrender values that policyholders may come across when purchasing a life insurance policy:
- Guaranteed Surrender Value
- Special Surrender Value
Guaranteed Surrender Value |
Special Surrender Value |
|---|---|
| This value is typically stated in the policy documents. | The special surrender value is calculated if the insured individual stops paying premiums but the plan continues until they opt to surrender it. |
| Insured individuals are eligible to receive this surrender value if they have paid premiums for 3 consecutive years. | After the premium payments stop, the sum assured will decrease, and the lower amount will be known as the paid-up value. |
| The surrender amount is equal to all the premiums paid so far, excluding the first premium amount and the premium amount paid to avail additional riders/benefits. | In order to calculate the special surrender value, you need to know your surrender value factor. This number remains 0 for the first 3 years and then increases every subsequent year. |
| When the guaranteed surrender value is paid, no additional bonus will be provided that you may have qualified for at the time of policy maturity. | If an individual stops paying premiums from the 4th year, we assume a surrender value factor of 30%. Additionally, in the 4 years, you earn a bonus of INR 30,000. |
| The Guaranteed Surrender Value is calculated by multiplying the total premiums paid by the surrender value factor (the percentage of total premiums paid). | Special Surrender Value = (Paid-Up Value + Bonus) x Surrender Value Factor |
| Example: Suppose Mr. Sharma has paid a total of INR 70,000 in premium up to the date and the surrender value factor is 40%, then guaranteed surrender value will be 70,000 x 40% = 28,000. | Example: Suppose Mr. Sharma has bought a policy whose premium is INR 20,000 per year for 10 years, providing coverage of Rs 4,00,000. He stops paying premiums after 4 years. A bonus of INR 30,000 is earned over four years and the surrender value factor is 30%. Paid-up capital = 4,00,000 x 4/10 = INR 1,60,000 (1,60,000 + 30,000) x 30% = INR 57,000 |
Insurance providers offer two kinds of surrender values, as we mentioned earlier. The guaranteed surrender value is a regulatory requirement. Usually, the guaranteed surrender value is a fixed percentage of your premiums, typically between 30-35% of all premiums paid, minus the first year's premium. Whereas, the non-guaranteed surrender value is calculated by considering various factors like sum assured, bonus, policy tenure, and the number of premiums paid.
Do All Life Insurance Policies Offer Surrender Value?
When purchasing a life insurance policy, it is essential to understand the terms and conditions thoroughly, as not all insurance policies will provide you with a surrender value. Usually, term insurance plans have no surrender value benefit. However, investing in life insurance plans like ULIPs and endowment plans will provide you with a surrender value.
Factors Considered While Calculating Surrender Value
Surrender Value is calculated by insurance providers considering various factors. The most common factors considered while calculating the surrender amount are mentioned below:
- Policy Term: Insurance holders opting for a longer policy term are more likely to receive a higher surrender value.
- Higher Premiums Paid: When insurance holders pay a higher premium, the calculated surrender value would be higher.
- Insured Individual's Age: If you purchase a life insurance policy at a younger age, there is a chance of availing a higher surrender value.
- Surrender Charges Imposed by Insurance Company: The surrender charges imposed by the insurer affect the surrender value. The more charges imposed, the less surrender value an insured will get.
Reasons Policyholders Surrender Their Policy
There are various reasons to surrender a policy, which are discussed below:
-
Found a More Suitable Option
Many times, even after doing thorough market research, an insured individual might come across a life insurance policy that they feel is more suitable for their needs and requirements and can fulfill their financial goals. Even though with increasing age, premiums increase for a life insurance policy, the most common reason for a life insurance policy surrender is because individuals found a better sum assured, better benefits, and bonus amount through some other policy.
-
Financial Emergency
Many times, due to financial emergencies and financial crunch, an insured individual might have to surrender their existing life insurance policy. Extra monthly expenditures might lead to the inability to pay life insurance premiums, leading to giving up the policy.
-
Require Additional Funds
When an insurance holder requires liquid cash and does not have it readily available, some individuals may look at surrendering their life insurance policy in order to receive the surrender amount, aiding in their need for liquid cash.
Conclusion
A surrender value offers the liberty to the policyholder to exit the policy in case they are unable to commit to the life insurance policy tenure. The surrender value or surrender amount will be provided to you on the basis of calculations made by your insurance provider. However, once you have surrendered your policy, the benefits associated with the policy will no longer be valid. Coverage for financial funds in case of your demise, or maturity benefits of your investments will be null and void. It is essential to make an informed decision before surrendering your policy.
Book a free call with a PolicyX expert
5-min consultation · No spam · No pushy sales
- Step 1 of 3
- Step 2 of 3
- Step 3 of 3
Compare Life Insurance Companies
Pick any two insurers to see a detailed side-by-side comparison.
Other Life Insurance Companies
Explore other top life insurers in India.