Ever wondered how much you can retrieve if you decide to discontinue your life insurance policy before it matures? Understanding the surrender value in insurance can help you evaluate your options effectively. Let’s dive into the concept and its calculation methods.
The surrender value is the amount paid by the insurance company to the policyholder if they terminate their life insurance policy before maturity. It applies to policies with savings or investment components, such as whole life or endowment plans, but not applicable to term insurance policies.
The surrender value is calculated after deducting applicable charges or penalties and is accessible only after completing the policy’s lock-in period, typically 1–3 years depending on the policy.
Surrender value in insurance can be categorized into two main types: Here is the detailed explanation of each.
GSV is the least amount that the policyholder has a right to claim if they prefer to surrender the policy before its maturity. It is predetermined and specified in the policy document.
The Guaranteed Surrender Value can be calculated with surrender value factor. Surrender value factor is a percentage that is used to compute the surrender value of an insurance policy. The GSV amount is calculated as a percentage of the total premiums paid, excluding any additional premiums and riders.
This percentage increases with the policy’s term. For instance, after 3 years, the premium increases to 30%, excluding the first year’s premium. After 5 to 7 years, it may become 50% or more of premiums paid.
Special Surrender Value (SSV):
This is an additional surrender value that an insurer may offer based on certain conditions, such as the policy’s bonus earning, fund performance, or the insurer’s discretion. Unlike the Guaranteed Surrender Value, it is not fixed and can vary.
Besides this, Special Surrender Value is often higher than the Guaranteed Surrender Value, especially for policies with significant bonus accruals or investment components.
The calculation of surrender value depends on whether it is the Guaranteed Surrender Value or the Special Surrender Value. Here is how each type is calculated
We know that the Guaranteed Surrender Value is the minimum amount the policyholder receives upon surrender. It is a legally assured amount and calculated based on the policy terms. Let’s understand its formula of computation.
GSV= Total Premium Paid x Surrender Value factor + Accrued Bonuses (if applicable)
Total premium paid: Excludes any rider premium, taxes, or extra charges.
Surrender Value Factor: A fixed percentage, specified in the policy terms, based on the policy conditions and duration of premium payments.
Accrued bonuses (if applicable): For participating policies, bonuses declared up to the surrender date are included.
Example:
If you have paid ₹50,000 as a premium over 3 years, and the surrender value factor is 30% (from policy factor table), then the guaranteed Surrender Value would be 50,000 x 30%= ₹15,000. Let’s assume the assured bonus is ₹10,000, then
Total GSV= ₹15,000+ ₹10,000= ₹25,000
Special surrender Value is nothing but the amount paid by the insurance company to the policyholder on terminating their policy before maturity date. This amount is based on the policy’s accrued benefits, and is usually higher than the GSV. It is calculated using the policy’s actuarial value and factors determined by the insurer. Let’s get knowledge of its calculating formula.
SSV= (Paid-Up Value + Bonuses) x Surrender Value Factor
Here the meaning of Paid-Up Value is the reduced value of the policy after stopping premium payments, which is calculated as,
Paid-Up Value= (Sum Assured x Number of Premiums Paid) / Total Number of Premiums payable.
Bonuses: Accumulated bonuses declared by the insurer (if applicable).
Surrender Value Factor: A percentage determined by the insurer and varies based on the policy’s term, age, and other factors.
Example:
If Sum Assured= ₹5,00,000
Policy Term= 20 years
Premium Paid= 10 years
Total Premiums Payable= 20years
Surrender Value Factor= 50%
Step 1: You need to compute paid-up value first-
Paid-up value= (₹5,00,000 x 10) / 20 = ₹2,50,000
Step 2: Apply SSV Formula
SSV= ₹2,50,000 x 50%= ₹1,25,000
So, the special surrender value is ₹1,25,000.
Each insurer can have particular methods or charts to compute surrender value factors. The accrued bonuses can also be included in the SSV. As per new norms, policyholders can obtain the calculated special surrender value after completion of the first policy delivered one complete year premium that has been received.
Deciding whether to surrender a life insurance policy depends on several factors. Here are some critical factors in order to assist you in reaching an informed decision.
Reasons to surrender a policy
If you urgently require funds and no better alternatives are available then you can terminate the policy in between.
If the policy has low returns compared to alternative investment options like mutual funds or fixed deposit then you are allowed to break the policy.
If the policy doesn’t align with your financial goals, for example, insufficient life coverage or mismatched maturity benefits, in such a situation you can think of surrendering the policy.
When you are unable to afford premiums or you have other financial commitments which are on priority, then surrendering the policy can be the only option for you.
Retaining a policy is a good decision when it aligns with your long-term financial goals, provides essential life coverage, or has accrued significant value. Here are the reasons to retain a life insurance policy.
Life insurance policies offer better return if you hold it until maturity, especially endowment or whole life policies. Additionally, bonuses and accrued benefits always grow significantly toward the later years of the policy.
Surrendering typically incurs heavy losses, especially in the early years. If you purchased a policy for 1 year and terminated it between the early 6 months, then you might have to pay a great penalty.
Surrendering can nullify the tax that you have already claimed. Moreover, maturity proceeds may also be tax-free under certain conditions.
If you have a term insurance plan providing adequate coverage, or if your policy no longer serves your financial goals, then surrendering can be a wise decision. But if you are close to a maturity date or the policy has significant bonuses accrued, then one should avoid surrender.
The surrender value of a life insurance policy depends on several factors, which determine the amount payable when the policyholder decides to surrender the policy before maturity. Here is a breakdown.
In traditional policy, surrender values are generally low in the initial years and increase over the time. In Unit Linked Insurance Plans, surrender value depends on the market value of the invested units.
If you buy a policy in your early life, then you might obtain a higher surrender value.
Duration of the policy: Surrendering in the early years (before 2-3 years of premium payments) often yields no surrender value. The surrender value increases as the policy nears its maturity.
The more premiums you pay, the higher the paid-up value, which directly affects the surrender value. Furthermore, the policies with fewer premiums paid, results in lower guaranteed or special surrender values.
Each insurer sets specific rules and tables for surrender value factors, guaranteed surrender value, and special surrender value, which affect the payout.
Understanding these factors helps in deciding whether surrendering is a financially sound decision?
Final Thoughts
Surrender value in insurance provides liquidity but comes with financial losses and reduced benefits. Carefully evaluate your financial goals and alternatives before surrendering a policy. Retaining a policy often yields better long-term returns and tax benefits.
The main benefit of surrendering value in a life insurance policy is that it delivers a cash amount when you terminate the policy in between. This is useful if you are stuck in a poor financial situation or you are dealing with any kind of emergency.
Yes, surrender value and cash value are distinct concepts in life insurance. Cash value is a saving or invested amount, whereas surrender value is an amount that policyholders can get after policy termination.
Insurance company for which a policyholder purchased a policy, pays the surrender value.
No, surrendering value for a term insurance policy does not provide any financial benefit.
Yes, any amount you received after ending your policy from the insurance policy can be taxed.
No, surrendering a policy doesn’t affect your credit score. If a life insurance policy has been used as a loan guarantor, surrendering the policy or accessing its cash value can affect the collateral arrangement.
Yes, you can reinstate a surrendered insurance policy. But it depends on the policy’s and insurance company’s terms and conditions.
Yes, surrendering a policy can incur penalties, like surrender fees or reduced surrender value.