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How surrender value of a life insurance policy is calculated


Life insurance is a long term commitment and there are some unfortunate times when you might have to surrender your policy. In other words, it means terminating the policy before its maturity. So, if you surrender a policy in the mid-term, you would get a sum (surrender value) of what has been allocated towards savings and earnings. Besides, a surrender charge also gets deducted from this amount, which varies from policy to policy. In this piece, we take a look at how the surrender value of a life insurance policy is calculated.

What is a surrender value?

Surrender value is the amount that a policyholder receives from the life insurer when he or she decides to terminate a policy before its maturity period. Suppose the policyholder decides on a mid-term surrender; in that case, the sum allocated towards the earnings and savings would be provided to him. A surrender charge is deducted from this depending on the policy.

Rakesh Goyal, director, Probus Insurance, said, “A recent directive by the Insurance Regulatory and Development Authority of India (Irdai) states that the policyholder can’t levy any surrender charges if the policy is exited after five years. Terminating the insurance plan would result in ceasing the benefits of the plan, including coverage.”

Types of surrender value

There are two types of surrender value—guaranteed surrender value and special surrender value

Guaranteed surrender value

The guaranteed surrender value is payable to the policyholder only after the completion of three years. This value makes up to only 30% of the premiums paid towards the plan. Moreover, it excludes the premium paid for the first year, additional costs paid towards riders and bonuses (you might have received).

“For instance, suppose you paid Rs30,000 (Rs10,000 per year x 3) in the initial three years for a sum assured of Rs3 lakh, the minimum surrender value you can get is 30% of Rs20,000, which is 6,000 (excludes the first year premium),” said Goyal.

Special surrender value

To understand this, one needs to first know what paid-up value is. Suppose the policyholder stops paying premium after a specific period, the policy would continue, but at a lower sum assured, which is termed as paid-up value. The paid-up value is calculated as original sum assured multiplied by the quotient of the number of paid premiums and number of payable premiums.

On discontinuing a policy, you get special surrender value, which is calculated as the sum of paid-up value and total bonus multiplied by surrender value factor.

“Suppose you paid Rs15,000 on an annual basis for a sum assured of Rs3 lakh for a policy tenure of 20 years. You stopped paying premium from the fourth year. Here, suppose the bonus is Rs30,000 and the value factor is 30%; then paid-up value will be equal to 60,000 and the special surrender value will be equal to {(60,000+30,000) x (30/100) }, which is Rs27,000,” said Goyal.

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