What is the meaning of Surrender value in insurance and Paid up value in Life Insurance? How do we calculate “Surrender value in insurance“? What is the difference between surrender value and paid up value in life insurance?
Ajay paid 3 years premium towards his Endowment Policy. He then realised that his policy was not an ideal one in terms of investment and he intends to close the policy and withdraw the money paid till date. Ajay had paid Rs. 10,000 for his policy over the past 3 years.
When Ajay approached the insurance company, he was under the impression that he would get around Rs. 32,000 from his investment of Rs. 30,000 in the last 3 years. The LIC office gave him the biggest shock of his life when they informed him that he was entitled to only receive Rs. 9,000 if he surrenders the policy now! This meant that Ajay will lose Rs. 21,000 of his invested amount during the surrender.
How did LIC calculate this amount of Rs. 9,000?
LIC calculated this amount based on the concept which is commonly known as the Guaranteed Surrender Value in insurance terms. This concept in simple definition means that in case one surrenders their policy after paying the first 3 premium, the Guaranteed Surrender Value is calculated at the rate of 30% of the premiums paid till date. In the example cited earlier, Ajay had only paid for 3 yearly premiums and as such he is entitled to receive 30% of the 3 premiums paid. This comes to 30% of Rs. 30,000 = Rs. 9,000.
To know this concept better, you must know what is Surrender value and Paid up value in insurance policies.
What is surrender value of a policy- Meaning?
Surrender value of a policy is the amount of cash value a policy holder receives if he/she terminates the policy before the term of the policy is completed i.e. maturity of the policy
If you are not ready to wait till the maturity date to receive the paid up value and are demanding the amount immediately, the insurance company will return the Surrender value of the policy. Surrender value is the present cash value of the Paid up value payable on maturity. The insurance company will calculate Surrender value by multiplying Paid up value with the Surrender value factor.
The policy will be cancelled after the payment of Surrender value in insurance. Also, you will not be entitled to receive any other benefits from this policy later date.
How Surrender Value is calculated?
Surrender Value in insurance is calculated on the basis of number of premiums you have paid.
- You need to calculate the paid up value.
- Based on paid up value, you will get either guaranteed surrender value or special surrender value by the insurance company.
What is guaranteed surrender value in life insurance?
Guaranteed surrender value in insurance is the minimum amount which will be provided by the insurance company if the policy holder leaves/terminates the policy in between the policy period.
As per the rules,
- Guaranteed surrender value is acquired when the policyholder has paid minimum 3 years premium if term of the policy is 10 Years or more.
- If the term of the policy is less than 10 years than the guaranteed surrender value is acquired if the policyholder has paid premium for 2 years.
Minimum guaranteed surrender value in life insurance is 30% of the premium value if an individual surrenders the policy between 2-3 years
It is 50% of the premium value in case one surrenders the policy between 4-7 years.
What is special surrender value in Life Insurance policy?
Special surrender value in insurance is normally higher than the guaranteed surrender value in life insurance as the insurance companies also consider bonuses in it.
Can LIC Policy be surrendered?
Yes, LIC policy can be surrendered. In fact traditional policy of any insurance company can be surrendered including LIC, ICICI Prudential Life Insurance, HDFC Life Insurance or Max Life Insurance.
What is Surrender Charge?
Surrender charge is the total amount of charges which the insurance companies deduct when someone surrenders their policy.
- Surrender charges are 100% if you have paid your premium for 1 year only.
- It is 70% when you have paid your policy premium for 2 years.
- Surrender charges are 50% if you have paid your premiums for 3-6 Years.
These surrender charges have been considered for a traditional policy having policy term of 10 years or more.
Surrender Value and Paid up Value – Difference
What is Paid up value of LIC policy?
Let’s suppose that Ajay wants to stop paying further premiums towards his LIC policy, but does not want to close his policy. In such cases, the insurance company will give the policy holder (Ajay) an option of Paid up for his policy. In this case, the policy will continue to be in force for a reduced sum assured called the Paid up value of the policy.
How to calculate the Paid up value in a policy?
Paid up value formula
Let us imagine that you have paid 4 annual premiums towards your 15-Year Endowment Policy worth Rs. 5 Lakhs. During the 5th year, you are no longer interested in paying further premiums in this policy. The policy will still continue to be in force for the reduced value called Paid up value. The Paid up value is calculated using the following formula:
Paid up value = Number of premium paid / Number of premium payable x Sum assured
In the above example, Paid up value = 4/15 x 500,000 = 133,333.
If you have paid the premium for 5 years or more, the insurance company will also consider the bonus amount into calculation. Then the formula for Paid up value will be as follows:
Paid up value = Number of premium paid / Number of premium payable x Sum assured + Bonus credited till date
In the above example, if the premium was paid for 5 years and a bonus of Rs. 120,000 was credited in the 5 years Paid up value, calculation will be as follows:
Paid up value = 5/15 x 500,000 + 120,000 = 166,667+120,000 = 286,667.
What does it mean for an insurance policy to be paid up?
If you discontinue further premiums in a policy and don’t want to close the policy, your policy value will be reduced to the Paid up value. This value will be payable to you on the maturity date. In a Paid up policy, you will not be eligible for any bonus declared in future. And in case of death of the policy holder before the maturity date, the nominee will get the Paid up value only. In the above example, if you are not paying further premium from 6th year, you will get Rs. 2,86,667 on maturity date. Your nominee will get the same amount in case of your death before the maturity date.
Is the cash surrender value taxable in LIC policy?
If you have paid 2 years of premium in a traditional policy, the cash surrender value is not taxable in LIC policy.
Conditions for Surrender
You cannot surrender all the policies. In most cases, the policy will be eligible for Surrender value in insurance only if you pay premium for at least 3 years if the policy term is 10 years and above. If the policy term is below 10 years, you need to pay premium for minimum 2 years. If you stop the policy before that, you will lose the premium paid.
Both Surrender value and Paid up value will not be attractive for the policy holders. But this option can be used to cut losses in a wrong policy which you have purchased. If you invest the further premiums in good options, you can recover the loss. Otherwise, be happy with the 4-5% returns from the traditional policies like the way you get interest on your saving account.
Surrender Value of LIC Policy – Call Helpline
If you are still confused on how to get LIC Policy Surrender Value, don’t worry. IVRS or Integrated Voice Response System is available at all time (24×7) from most cities and is providing required information to customers. Any customer can contact LIC IVRS by dialling Universal Access Number (UAN) 1251.
For making local call from any MTNL or BSNL number, simply dial 1251 and for other than local users, IVRS can be accessed by dialing the STD code of the IVRS Centre followed by 1251. You can get all the information regarding your policy including the Surrender Value of LIC Policy by this method.
Or you may visit any of the LIC offices in your area with your Policy number to get the Surrender Value of LIC policy.
Should I surrender my LIC Policy?
Surrender value in insurance will not be attractive in most of the cases and you may stand to lose, if you surrender your LIC policy. So surrender should be the last option.