Simply said, Surrender Value is the set percentage of the cash paid by the life insurance company when you, as a policyholder, opt to terminate a policy before it matures. There are many reasons behind surrendering your life insurance plans. It could be because there is a sudden monetary need that can only be met by surrendering your policy, Or maybe the policy you purchased five years ago no longer satisfies the reason you bought it.
Do all policies offer a surrender value?
Can you surrender a term life insurance policy? Yes, you can. However, this will inevitably reduce the policy’s value. To surrender your life insurance plans, you must first contact your insurance service provider. If you decide to surrender a life insurance policy, make sure you understand the terms and conditions. The insurer will then determine the surrender value to be paid to you.
For example, if you decide to terminate your term insurance policy in the midst of the term, you will not receive any compensation or surrender value. However, for insurance plans such as Unit-Linked Insurance Plans (ULIPs) and Endowment Plans, you will receive a surrender value if you have paid your premiums for at least three years. The policyholder needs to know that the surrender value will be less than the premiums you paid for the insurance. It is best to call the insurance company to determine the actual surrender value or life insurance quotes of your term insurance policy.
When is it OK to surrender your policy?
There are numerous reasons why you might want to surrender your life insurance plans. One of the most common motives for surrendering coverage is that the policyholder no longer has enough income to continue paying premiums. If paying premiums has become a financial responsibility rather than an asset, you may want to consider surrendering your coverage and look for another insurance plan that offers life insurance quotes that fit your budget.
Another possible cause is that the policyholder no longer has dependents to provide for in the event of their death. You may also wish to cancel your current policy if you find another insurance plan that meets your needs and provides better coverage.
Types of Policy Surrender Values
There are two types of surrender values available: guaranteed and Special surrender. Let’s briefly talk about this:
Guaranteed Surrender Value: This is the value that is commonly specified in insurance brochures and documentation. In other words, Guaranteed surrender value is the amount guaranteed to the policyholder if the policy is voluntarily terminated prior to maturity. Surrendering your life insurance plan before maturity, however, carries a penalty. You are eligible for the Guaranteed Surrender value if you have paid the premium for three years in a row. The sum represents all premiums paid up to this time, except the initial payment and any premiums paid for additional benefits or riders. Any bonus money you earn upon the plan’s maturity will be excluded from the policy’s surrender value. Guaranteed surrender value is calculated by multiplying total premiums paid by the surrender value factor (a percentage of total premiums paid). When the life insurance plans approaches its maturity date, the surrender value factor will be nearly equal to the total amount of premiums paid.
Special Surrender Value: The total sum assured, premium payments, policy tenure, and bonuses all contribute to the plan’s special surrender value. When a policyholder fails to make premium payments, but the plan remains in effect until they decide to surrender it, the special surrender value is calculated.
How is the Surrender Value Calculated?
The surrender value of the policy is fixed by the Policy Regulatory and Development Authority of India (IRDAI) during the first seven years. Beginning with the seventh year, the insurance provider determines the surrender value after conferring with the policy regulator.
From the third year, the surrender policy is worth up to 30% of the paid premium; between the fourth and seventh years, the surrender value drops up to 50%. The rule of thumb is that the closer you are to your maturity date at the time of exit, the greater the amount you receive at closure.
Guaranteed Surrender Value: Calculating guaranteed surrender value is very simple. For example, suppose you’ve paid Rs 40,000 in premiums, and your surrender value component is 30%.
Guaranteed surrender value equals premiums paid multiplied by the surrender value factor. (In other words, Surrender Value Factor * Premiums paid)
Guaranteed Surrender Value = 40,000 * (30/100)
Guaranteed Surrender Value: INR 12,000.
Special Surrender Value: Let’s use a similar example using the same numbers to determine your special surrender value. Assume you purchase a policy with yearly premiums of INR 10,000 for a duration of 10 years and a total sum assured of INR 2 lacs. After four years of premium payments, you decide to cease paying them. First, determine your Paid-Up Value:
Paid-Up Value = Original Sum Assured x (No. of Premiums Paid/No. of Premiums Payable)
Paid-Up Value = 2,000,000 x (4/10)
Paid-Up Value = 2,000,000 multiplied by 2/5.
Paid-Up Value: INR 80,000.
Your surrender value component will once again be 30%. The surrender value factor is always zero for the first three years, which means you will not receive any money if you surrender your policy before three years. Various businesses determine their own surrender value factor, but it is often a percentage of premiums paid throughout the tenure of your insurance policy. For example, if you stop paying premiums in or after the fourth year, we can assume that your policy’s surrender value is 30%. Assume you earned a bonus of INR 30,000 over the course of four years. Use this information to compute your particular surrender value:
Special Surrender Value = Paid-Up Value + Bonus x Surrender Value Factor
Special surrender value = (80,000 + 30,000) multiplied by (30/100).
Special surrender value = 1,10,000 x (30/100).
Special Surrender Value: INR 33,000
Bottom line
Surrender value in insurance allows policyholders to terminate their plans if they no longer require the said coverage. When a life insurance plan is surrendered, the policyholder loses coverage, and if they die, the nominee receives no benefits. Therefore, you should properly research your policy documents and carefully evaluate your options before giving up a life insurance policy.
