Have you ever got the feeling that the insurance policy you have purchased does not fit your requirements. Do you know if you surrender your policy and you can still get your calculated premium amount back. Do you know what is surrender value? OR should you make your policy paid up?
If these are the questions which haunt you then you can check the details below and get your queries sorted. So lets deep dive on the topic.
What is Surrender Value?
When you buy an insurance policy and after some time if you feel that the policy does not gives the intended return or the policy is not matching with your long term requirements, then you can go back to the insurer and surrender your policy. On surrendering your policy, the insurer will pay the surrender value to you back.
In short surrender value is the value you received from the insurer when you surrender your policy before the maturity. On surrender of the policy, you terminate the contract between you and the insurer and you are no more liable to pay any premium.
The reason for the surrender could be many such as inability to pay the premium, policy not matching with the requirement, low return on investment, etc.
Note -Please note that surrender value is applicable to insurance policies that have an investment component into them – like endowment policy, money-back policies, Unit Linked policies (ULIP’s), etc. Surrender value is not applicable to term insurance as there is no maturity or investment benefit embedded in it.
As you have paid the premiums till date, this premium would have invested and would have grown. Hence when you surrender the policy then the insurer has to payback this amount. However there would be certain charges that would have been levied towards your insurance coverage and admin charges. This amount would be deducted from your surrender value.
Calculation of Surrender Value
In some of the policies, the insured is eligible for bonus component too hence while calculating Surrender value, the bonus amount is also considered.
The formula for Surrender value is as below
Surrender value = ((No. of premiums paid/No. of premiums payable)* Sum assured) + Accrued bonus) *Surrender value factor.
Now this surrender value factor keeps changing from company to company and depends on other factors too. Usually surrender value factor is 0 (zero) till 3rd year and from 4th year onwards there is some value to this factor.
Example – What is surrender value
Lets say you have paid 4 years premium for a 20 year policy. The sum assured is rs. 500000 and you have an accrued bonus of 10000 till 4th year. Annual premium for the policy is 18000 per year. The surrender value is 0.25.
Surrender value = [((4/20)*500000) + 10000]*.25
Therefore the Surrender value of the policy = Rs. 27500/-
In the same example, if the premium paid is for 8 years, bonus accrued is Rs. 20000, then the surrender value of the policy is Rs. 55000 with the same surrender value factor.
This means the more premiums you pay, the surrender value increase along with surrender value factor.
What is paid up Value?
Now, this is another option available to the policyholder in case he is dissatisfied with the policy.
In this case, the policy holder does not surrender the policy to the insurer and instead makes the policy paid up. The policy is then not terminated and continued till its maturity. However the sum assured is drastically reduced in this case. Also there is no expectation to pay further premium by the insured.
The reduced sum assured now becomes the paid up value of the policy. This amount is received but the policy holder at the end of the maturity or to the nominee in case of unfortunate death.
Calculation of paid up value
Paid up value = (No of premiums paid/No of premiums payable)* Original sum assured
Taking the 1st example, we calculate the paid up value
Paid up value = (4/20)*500000
Paid up Value = Rs. 100,000
Therefore this amount of Rs. 100,000 would be receivable by the insured at the end of 20 years
Surrender or Paid up – Which option to go?
Now going for surrender or making the policy paid up is a very subjective decision. This decision is based on each individual’s requirements and preferences.
However I would suggest if the policy holder is not satisfied with the performance of the policy then he should surrender the policy and get his money back (provided the policy is fully paid up for 5 years atleast). This will give the policyholder an upfront money which he can invest and make it grow.
Even if someone opts for paid-up policy, then he has to wait until the maturity and the amount received would be meagre. Usually policies provide 7-8% of returns which if calculated from inflation point of view becomes negligible in the long run.
Whatever decision one will take should be only after consulting with his/her financial advisor or insurance agent through whom he has procured the policy. They can give them a better view of the options.
Well that’s it and hope this article was an informative one. So next time you should not be confused about the question “What is Surrender value” of the policy.
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