Understanding Surrender Value in Life Insurance Policy

Every insurance policy comes with a fixed tenure, during which the insured needs to pay the premium on a regular basis, as per the terms and conditions of the policy. There may be situations where the insured wishes to terminate the policy due to various reasons such as financial crunch, plans of investment with other policies, etc.When the insured exists from an insurance policy before its maturity, the insurance company may choose to pay a specific sum to the insured as per the terms of the policy, which is called as the surrender value of life insurance policy. This is the accumulated component of the policy until the termination happens.

• Surrender value is only available for policies that have an investment component such as unit-linked insurance plans, endowments plans , etc., and not on term plans or insurance-only plans.
• When you surrender a policy , the insurance component holds no more, and the dues are paid after deducting the surrender fees, which is charged by the insurance company on premature termination of insurance policies.
• An insurance plan can be terminated for cash, only after you have paid a regular premium for a specified time, generally 3 years.
• Upon surrendering the policy, you cannot avail of the tax benefits on premium payments anymore.
• Two surrender values can be considered for paying the insured - t he guaranteed surrender value and the special surrender value. The payment usually is made as per the surrender value which is higher or as per the policies of the insurer.

Below are two types of surrender values that may be taken into account while calculating the due amount to be paid to the insured, when the policy is terminated before maturity.

1. Guaranteed Surrender Value The guaranteed surrender value is a percentage of the total premiums paid till the time of surrendering the policy. The total premium paid excludes the first-year premium and any rider premium. The payable percentage depends upon the number of years for which the insured has paid premiums before surrendering the policy. It normally varies from 30-90% of the paid premiums. The details and illustrations of guaranteed surrender value are generally mentioned with the policy details.
2. Special Surrender Value The special surrender value depends on the assured sum, the number of premiums paid, the policy term, any bonus received, and the surrender value factor. It is calculated as below:

(Assured sum*(No of paid premiums/no of payable premiums)+bonus received) * surrender value factorThe special surrender value is generally higher than the guaranteed surrender value. Make sure to check the surrender value factor with your insurance advisor since it varies from company to company. The surrender value factor is 0 for the first three years and keeps on increasing thereafter. Hence, the more you stay invested with the policy after three years, the higher will be the surrender value factor.

Even if your policy provides you with the option to surrender it before maturity, experts suggest refraining from policy termination unnecessarily. Apart from losing the tax and insurance benefits, the money you receive on surrendering the policy is lesser than the amount invested. Hence it is not advisable to terminate the insurance policy unless it is unavoidable.Insurance policy comes with multiple benefits including tax saving, life coverage, and investment opportunity if its an endowment policy, a ULIP or other investment-focused life insurance plans . You must try your best to stay invested in the policy throughout its tenure to avail maximum benefits.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.