The Buyt Desk
Life insurance is a long-term plan but you may want to end it even before the term. On ending it you will get some amount based on the premiums paid.
A life insurance policy is an investment vehicle that needs a long-term commitment to paying premiums on time. But there might come a time that needs you to end your policy before maturity as you will be unable to pay premiums or in need of money. That is when you will surrender your policy before the policy term. On ending before the policy term, you will get some money from the premiums that you have already paid and you will be no more covered under that policy. Also, you will be charged a surrender fee and this value is different for different policies.
What is the Surrender Value of Life Insurance Policy?
Surrender value is the money that the policyholder gets from his/ her insurer after ending the policy before its maturity. And the policy has surrender value only after 3 years from buying of policy. If you want to terminate the policy within the first three years, then you will not receive any amount. The higher the number of years the premium paid, the higher will be the surrender value. The amount allocated towards the earnings and savings of the policy will be given to the policyholder when it is terminated in the middle of the policy term. This amount is paid after deducting the surrender charge.
What are the types of surrender value?
Surrender values are of two types and they are –
1. Guaranteed Surrender Value – This is the assured amount that the policyholder is paid by the insurance company on terminating the policy before maturity. But the only condition is the completion of 3 years and a one-time premium payment. The amount payable is calculated based on the surrender value factor which is mentioned in the policy document. The surrender value factor is described in percentage and this is the percentage of the sum of premiums paid to date. This value may start with 30% and nearly 99% when near maturity. Most of the traditional insurance policies follow Guaranteed Surrender Value.
Guaranteed Surrender Value = (total premiums paid – the first year premium)* the surrender value factor.
2. Special Surrender Value – This value is mostly higher than that of the Guaranteed Surrender Value. This is applicable only to a few insurance policies and the same will be specifically described in the policy document. Special Surrender Value is calculated considering the premiums paid, sum assured, bonuses and policy term. Also, there is a term called paid-up value which is arrived on the sum assured and a number of premiums paid till the surrender of the policy. When you miss any premiums, the sum assured will be lowered. This lowered value of the sum assured is known as the paid-up value. And if no premium is missed, the paid-up value will be the original sum assured.
Special surrender value = (Paid-up value + accumulated bonuses) * surrender value factor.
Paid-up value = the sum assured * (Number of premiums paid/Number of premiums payable)
How to calculate Surrender Value?
Nowadays you will not need your policy agent to get you the surrender value. You can arrive at this value by yourself using an online surrender value calculator. All insurance companies have their own surrender value calculator on their website. Just enter the details it asks for and it will calculate the surrender value for you. You can calculate it for different dates and then decide when to surrender your policy. This surrender value calculator will help you plan your financial actions.
Summing up
Never forget that once you surrender your policy to your insurance provider, all your risk coverage by the policy will cease and you will have no benefit covered. So think before you surrender your policy. When you surrender much before the policy term ends, you will lose a lot of the premium paid amount. Only when it is a year or two away from the maturity you will lose 2-5% of the premium paid. So, surrendering your policy you will lose some money that you have invested, no coverage and no tax benefits. So think twice before surrendering your life insurance policy. Also, look out for other sources where you can generate money without disturbing your insurance policy
