Calculating the Surrender Value of a Life Insurance Policy

Life insurance policies are generally for longer durations of over ten years and result in the payment of maturity benefits after that. However, in certain situations, the policyholders may have to terminate their policy before maturity and surrender it to the insurance company. This could be because of the policyholder’s inability to continue paying the premiums or dissatisfaction with the policy’s working or any other reason. In such a scenario, the insurance provider pays a surrender value from the premiums allocated for savings and investments, after deducting a surrender charge.  As per the recent regulations announced by the Insurance Regulatory and Development Authority of India or IRDAI, no surrender charges are deductible if a policyholder surrenders a policy after five years.

Understanding Surrender Value

We know the answer to “what is life insurance,’ and what are the benefits offered by it. But if due to some reason the policy has to be surrendered or terminated prematurely, the life insurance provider repays a portion of the premiums paid while deducting some expenses. This amount received by the policyholder on early surrender is called the surrender value. All the benefits including the insurance coverage available to the policyholder cease to exist on the surrender of the life insurance policy.

Does a life insurance policy have a surrender value at all stages? No, a life insurance policy gets a surrender value only after it has been in force for some time and the policyholder has regularly paid premiums for at least two consecutive years (if the policy duration is less than 10 years) and for at least three consecutive years (if the policy duration is 10 years or more).

Types of Surrender Value

The surrender value differs from one policy to another but three are two main types:

  1. Guaranteed Surrender Value– The guaranteed surrender value is a fixed amount or percentage of the premiums paid towards the policy and is decided by the conditions and terms mentioned in the policy document. The guaranteed surrender value increases with the number of years in policy. The value, however, excludes the premiums paid in the first year and any additional costs paid towards the purchase of riders or bonuses received by the policyholder.
  2. Special Surrender Value-This type of surrender value is decided based on the total sum assured, the number and quantum of premiums paid by the policyholder, the bonuses paid by the insurance provider, and the duration of the policy. The formula for calculating the special surrender value is:

(Accrued Bonuses + Paid-up Value) x surrender value factor.

The paid-up value is the sum assured multiplied by the quotient of the number of premiums paid and the number of payable premiums.

Here it is important to note that not all policies have surrender value. Term insurance plans with no savings element will lapse while policies having a savings or investment component have a surrender value. Unit Linked Insurance Plans or ULIPs and endowment plans have a savings component that is used for paying the surrender value to the policyholder.

Just like a life insurance calculator can be used to calculate the sum assured of a policy, a surrender value calculator can be used to find out the surrender value. This online tool is simple to use and requires a user to provide contact and plan details along with the number of premiums paid for the calculation of the surrender value.

Loans Against Surrender Value

The calculation of surrender value is important not only when a policyholder decides to terminate a policy early but also for taking a loan against it. Different policies have different rules for providing loans to policyholders against the surrender value. Since the surrender value of a policy is quite low, it is advisable to borrow against it only in its later years.

Process of Surrendering a Policy

A policyholder wanting to surrender a life insurance policy needs to inform the insurance company about it and submit a policy surrender request form. The form has to be accompanied by the original policy document, a cancelled cheque, a self-attested copy of the KYC documents. The reasons for surrender may also need to be provided. The insurance company processes the surrender request in a few days and transfers the surrender value to the policyholder’s bank account.

Surrendering a policy means loss of all the benefits including the insurance coverage associated with it. So, a policyholder should carefully consider the pros and cons of surrendering a policy before making a decision.

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