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What is the Surrender Value of Life Insurance?
Deciding to purchase life insurance can seem overwhelming. The idea is to protect your family financially if anything happens to you. Most people opt for life insurance when they have large financial responsibilities or if they have people who depend on them financially. But what happens if circumstances change? Can individuals opt out of their policy if they no longer require life cover? Let’s find out.
What Is the Surrender Value of a Life Insurance Policy?
A policyholder can opt to discontinue a life insurance policy before the plan’s maturity date. Should anybody choose to surrender their policy mid-way through the term, they will not receive the entire maturity amount. Instead, they will receive a portion of the sum, which is referred to as the surrender value of the policy.
Types of Surrender Values
When you read your policy documents, you may come across two types of surrender values:
- Guaranteed Surrender Value
The guaranteed surrender value amount is usually mentioned in policy documents. If you have paid the premium for three consecutive years, you are eligible to receive the amount you choose to surrender your policy. The amount is equal to all the premiums paid so far, excluding the first premium amount and the premium amount for additional benefits or riders. The surrender value will not include any bonus amount you might be eligible for on the plan’s maturity.
- Special Surrender Value
The special surrender value gets calculated in cases where the policyholder stops paying premiums, but the plan continues until they choose to surrender it. Once the premium payments stop, the sum assured may decrease and the lower amount is known as the paid-up value. You can calculate the amount by multiplying your original sum assured with the total number of premiums paid. You then need to divide the amount by the total premiums payable. For example, you pay INR 15,000 per year. You have a sum assured of INR 3,00,000 and the policy tenure is 20 years. You may stop paying premiums from the fourth year.
Let’s calculate your paid-up value.
Paid-Up Value = Original Sum Assured x (No. of Premiums Paid / No. of Premiums Payable)
Paid-Up Value = 3,00,000 x (4/20)
Paid-Up Value = 3,00,000 (x1/5)
Paid-Up Value = INR 60,000
To calculate the special surrender value, you also need to know your surrender value factor. The number remains at 0 for the first three years. It then increases every subsequent year. Various companies decide their own surrender value factor. For example assume you stop paying premiums in/ from the fourth year, we can use a surrender value factor of 30%. In the four years, you earn a bonus of INR 30,000 Let’s use this information to calculate your special surrender value.
Special Surrender Value = (Paid-Up Value + Bonus) x Surrender Value Factor
Special Surrender Value = (60,000 + 30,000) x (30/100)
Special Surrender Value = 90,000 x (30/100)
Special Surrender Value = INR 27,000
Do All Life Insurance Policies Offer a Surrender Value?
When you choose to surrender a life insurance policy, you must be careful. Policies like term plans, which do not offer any maturity benefits, do not have a surrender value. If you choose to terminate these policies mid-term, you are not eligible to receive any kind of payout. Life insurance policies such as Unit-Linked Insurance Plans (ULIPs) or endowment plans will provide you with a surrender value as long as you have paid your premiums for at least three years.
What Is Surrender Value Fees?
The surrender value fee is amounts that your insurer will charge you when you decide to terminate your policy before the agreed-upon date.
Understanding the Difference between Surrender Value and Cash Value
Many people use the terms ‘surrender value’ and ‘cash value’ synonymously. Unfortunately, this isn’t true. Your policy’s cash value refers to the actual amount your policy is worth as a direct result of the premiums paid and the returns earned on that amount.
The surrender value, on the other hand, refers to the amount you will receive when you terminate your policy early. It is only a part of the actual cash value since the insurance company will not return the initial premium or any bonuses.
Is Surrendering My Policy a Good Idea?
In dire financial situations, some people feel they have to surrender their life insurance policy for quick liquidity. Surrendering a plan may not be prudent for two reasons. First, it gets rid of your life coverage and maturity bonus amounts, which could prove beneficial to you and your family members at a later stage.
Secondly, it will provide you with a sum lower than the actual cash value of your policy. Instead of surrendering a life plan, you can choose to take out a loan against the policy. Some insurance plans allow you to borrow directly from the corpus you’ve built up so far. If you do not have that option, you can provide your life policy as collateral for a loan from a financial institution. You can choose to keep your policy active and still get the liquidity you need immediately.
Deciding to surrender a life insurance policy is never easy. Before you make any decision, ensure you are fully aware of the potential financial implications. You can calculate your potential surrender value in advance so that you know what you are entitled to before terminating your policy. Always check for other solutions before surrendering your policy as it could prove helpful in the future.
ARN -ED/06/22/29556
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Francis Rodrigues
Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.
Written By:
HDFC Life
Reviewed by Life Insurance Experts
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