A life insurance policy is often bought for long term to protect the financial future of your dependents. However, owing to few unfortunate events, you may require surrendering your life cover. In simpler terms, it means terminating your life insurance before its maturity. So, when you surrender your policy in the middle, you get a sum i.e., the surrender value of what’s allocated towards your earnings and savings. Note that a surrender charge often is deducted from the amount, which may differ from one policy to another. Here, you will learn how a life insurance policy’s surrender value is computed.
What is a surrender value?
Surrender value refers to the amount that you receive as a policyholder from the insurer when you decide to end your policy before that maturity date. Assume that you decide on surrendering your policy mid-way. In this case, you will receive a specific amount that you paid regularly as a premium to the insurance provider. A surrender fee is deducted from it based on your insurance policy.
How is surrender value computed?
You can compute the exact surrender value with the assistance of a cloud-based instrument called an online surrender value calculator. This cloud-based surrender value calculator can be accessed on any of the insurers’ websites. To obtain this detail, all you must do is input some basic information like the premium paid amount, policy term, mode of premium payment, number of policy years completed, etc. This works just like the life insurance premium calculator. Once you input all the info, the online surrender value calculator instantly calculates your policy’s surrender value.
When can you acquire the surrender value?
When the duration of the policy is 10 years or more –
In such a scenario, the surrender value of life insurance is obtained if you have regularly paid your premium for 3 consecutive years.
When the duration of the policy is below 10 years –
In such a scenario, you may get the surrender value if the premium of the policy is paid regularly for at least 2 consecutive years.
Types of surrender value you must beware of –
Guaranteed surrender value
Post completion of 3 years of your life insurance policy, guaranteed surrender value is payable. This value is up to 30 per cent of your paid premium for the plan. And it excludes the premium paid for the first year, and the additional amount paid towards bonuses and riders.
For example, assume that you paid Rs 45,000 (Rs 15,000 per year X3) in early 3 years for a sum assured of Rs 4 lakh, the minimum surrender value will be 30 per cent of Rs 30,000, which is 9,000 (excluding first-year premium).
Special surrender value
To understand it, you must initially know the meaning of paid-up value. Assume, you as a policyholder stop making your premium payment after a particular period. Despite this, the policy will continue, but it will be at a reduced sum assured, called paid-up value. Paid up value is calculated as the original sum assured, which is multiplied by the quotient of paid premiums and payable premiums. When you discontinue the policy, you will get a special surrender value. This is computed as the paid-up sum value and overall bonus multiplied by the surrender value.
Suppose you made the premium payment of Rs 10,000 annually for a sum assured of Rs 4 lakh for the tenure of 25 years. You stopped making the premium payment from 4th year. Here, if your bonus amount is Rs 20,000 and value factor is 30 per cent, then the paid-up value will be Rs 40,000 and special surrender value will be {(40,000 + 20,000) X (30/100)}, which is Rs 18,000.
