Surrender value the amount the policyholder will get from the life insurance company if he decides to exit the policy before maturity.

What is surrender value?
It is the amount the policyholder will get from the life insurance company if he decides to exit the policy before maturity.
A mid-term surrender would result in the policyholder getting a sum of what has been allocated towards savings and the earnings thereon. From this will be deducted a surrender charge, which varies from policy to policy. As per a recent Insurance and Regulatory Development Authority (IRDA) directive, life insurance companies have been asked not to levy surrender charges if the policyholder chooses to terminate the cover after five years.

When does a life insurance policy acquire surrender value?
A regular premium policy acquires surrender value after the policyholder has paid the premiums continuously for three years. If, after paying premiums for three years, you do not wish to continue with the policy, you can convert it into a paid-up one, freezing your investments at that level. However, you need to make sure that you keep track of this policy till it matures.

What do policyholders stand to lose when they exit the policy?
Once you decide to exit the insurance policy, all the benefits associated with it — including the protection cover — will cease to exist. Therefore, ideally, you should consider terminating the policy only if you believe that you have been sold a policy that does not fulfil your requirements, or the features prove to be different from what was promised to you.

Also, if you surrender the policy during the early years of the policy, say three years from its inception, the surrender value will amount to roughly 30 per cent of the premiums paid to date. Also, insurance companies exclude the premium paid in the first year while calculating the surrender value. In case of unit-linked insurance plans (ULIP), particularly, the insured stands to lose a great deal as the premium allocation charges in these schemes are front-loaded. In other words, a sizeable chunk of the premium paid in the initial years goes towards charges, including agent’s commission, and the remaining, substantially reduced amount, is directed to your fund.

Do all policies acquire surrender value?
No. Only those policies which contain an embedded savings component — like ULIPs and endowment plans — will partially return the amount invested for the life cover. Surrendering term plans, which are pure protection covers with no savings element, will result in lapsation of the policy.

Is surrender value relevant if a policyholder does not terminate his policy?
The surrender value acquired by your policy is also used to calculate the loan amount you are eligible for. Some insurers grant loans against life insurance policies to the extent of 85-90 per cent of the surrender value. LIC offers loans against insurance policies at the rate of nine per cent per annum.

Alternatively, you can also pledge the policy to a bank and borrow against the same. Do note, however, that borrowing during the initial years of the policy may not be a good idea because of the low surrender value it would acquired till then.
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