Surrender Value in Life Insurance

What is surrender value in Life Insurance?

Surrender value meaning, it is the amount the insurance company pays to the policyholder when he/she decides to terminate the plan before maturity. If the policyholder decides on the surrender policy, then the sum distributed towards earnings and savings would be given to the policyholder.

Types of Surrender values:

1. Guaranteed surrender value, and
2. Special surrender value 

What is Guaranteed Surrender Value in Life Insurance?

The Guaranteed Surrender Value (GSV) in life insurance is the minimum amount that a policyholder is assured to receive if they voluntarily terminate their policy before maturity (surrender policy), subject to certain terms and conditions. It is typically calculated as a percentage of the total premiums paid, excluding the first-year premium, any premiums paid for riders or additional benefits, and any bonuses accrued. This percentage is known as the surrender value factor and is specified in the policy documents.

The GSV usually becomes payable after the policy has been in force for a minimum period, commonly three years. For example, if a policyholder has paid ₹30,000 in premiums over four years, and the surrender value factor is 30%, the guaranteed surrender value would be 30% of the premiums paid after the first year, minus any applicable surrender charges. Surrender charges are penalties deducted from the surrender value, which vary by policy and insurer.

The guaranteed surrender value does not include bonuses or additional returns that might be earned by the policy; those are considered in the Special Surrender Value, which is generally higher and depends on factors like the sum assured, total premiums paid, policy term, bonuses, and whether the policy is paid-up (i.e. premiums stopped but coverage continues at a reduced sum assured).

What is special surrender value in Life Insurance?

A special surrender value is calculated using the formula:

Initial base sum assured × (Premiums paid − Premiums payable + Bonus) + Surrender value factor.

If the policyholder stops paying premiums after a certain period, the policy does not lapse but continues with a reduced sum assured, known as the paid-up value. This paid-up value represents the proportionate reduction in coverage based on the premiums actually paid, allowing the policy to remain in force without further premium payments.

The paid-up value affects the benefits payable under the policy. In the event of maturity or claim, the policyholder or nominee will receive a reduced sum assured along with any accrued bonuses, reflecting the lower coverage. This ensures some level of protection and return, even if premium payments are discontinued.

Example, let's say you pay Rs. 30,000 in premiums each year for a 10-year policy with a sum assured of Rs. 3 lakh. Assuming you stop paying premiums after 4 years, the bonus accumulated so far will be Rs. 60,000, and because the surrender value factor in the fourth year is 30%: the special surrender value = (30/100) *(6,00,000*(4/10) + 60,000) = Rs 90,000. 

As more premiums are paid, the more will be the surrender value. Surrender value is calculated by taking the paid-up value and the bonus into account. In the first three years, this factor is zero, but it increases from the third year onward. Normally, it varies from company to company and is influenced by factors such as the type of insurance policy, the maturity date, the number of years the policy has been in operation, industry practices, and the fund performance for a particular policy. Surrender value factors are not mentioned in every company's brochure.

Regulation:

Regulatory guidelines, such as those by IRDAI in India, mandate insurers to provide clear illustrations of guaranteed surrender value, special surrender value at the time of sale, ensuring transparency for policyholders. Insurers cannot refuse a surrender request once the policy is eligible for surrender, but surrender charges and reduced benefits mean the policyholder often receives less than the total premiums paid if surrendering early.

Which Insurance policies provide Surrender Value?

Apart from Pure Term Plan policy (without Return of premium), all other Life Insurance Policies offer surrender value. 

Zero Cost Term Plan, Endowment Policy, Whole Life Insurance, Unit Linked Insurance Plans (ULIPs), Money-Back Plans offer surrender value.

Summary:  

Surrender value is the amount returned on policy termination before maturity, calculated as the higher of GSV or SSV, with recent regulatory changes enhancing policyholder benefits and refund amounts.

Pro Tip : A better alternative to surrendering the life insurance policy is Policy Assignment.

Thanks,

Honvest Team.