Please check you policy document first, whether surrender option is present or not. If you are not sure please check with your agent or insurance company.
What is a Surrender Value?
Surrender value is the value, that the policyholder gets, if he chooses to terminate or stops paying the premium before the policy premium paying term ends.
Different companies use different approaches to arrive at the surrender value. Usually, the calculation takes into consideration factors such as completed policy years, policy type and time to maturity, with-profit fund performance in case of participating policies, besides the company’s customer philosophy, internal underwriting policies and industry practice.
The amount available in cash upon cancellation of an insurance policy, usually a whole life policy, before it becomes payable upon death or maturity. also called cash surrender value or cash value.
There are two types of surrender options available –
1- Cash Surrender Value (CSV) or Special Surrender Value (SSV)
Before CSV or SSV, we must understand paid-up value. If you stop paying premium after a specified period, your policy will continue but with lower sum assured. This reduced sum assured is called paid-up value or paid-up sum assured. Paid-up value is calculated by multiplying the original sum assured and the ratio of the number of premiums paid to the number of premiums payable.
CSV and SSV are one in the same but the surrender value is the cash value minus surrender charges. Over time the surrender charges go away.
To calculate CSV or SSV, there are two methods –
A- Special Surrender Value Formula
If you discontinue the policy, the amount you will get is called the special surrender value. This is arrived at by multiplying the total paid-up value (paid-up value + bonus) with a multiplier called the surrender value factor.
In this case following formula is used to calculate the Special Surrender Value –
Special Surrender Value =
{Basic Sum Assured X (Number of Premiums Paid/Total Number of Premiums Payable) plus Total Bonus Received} X Surrender Value Factor
*Here the surrender value factor is a percentage of paid-up value plus bonus. It is zero for the first three years and keeps rising from third year onwards.
From where do we get Surrender Value Factor?
It’s not a standard factor and differs from company to company and depends on various other factors. Not all life insurance companies declare the ‘surrender value factor’ in the product brochure or on their website. But you could get this information from the agent or the insurance company directly.
B- Discounted Value or Accumulated Value
Some products give policyholder discounted or the accumulated value as Surrender Value. For example –
a) 80% Of maturity sum assured if less than 4 years premiums have been paid,
b) 90% of the maturity sum assured, if 4 or more years but less than 5 years premiums have been paid and
c) 100% of the maturity sum assured, if 5 or more years premiums have been paid.
*If the premiums have been paid for a fraction of a year, the maturity sum assured shall be worked out by way of mathematical interpolation.
Note – There could be other methods to calculate CSV or SSV, so please read the policy document or contact your life insurer for more info.
2- Guaranteed Surrender Value (GSV)
The GSV may depend on how many years your policy has been active, the policy term, the product, the company’s performance and so on. You are eligible to receive GSV if you have paid premium for at least three years. It is 30 per cent of the basic premiums paid, excluding the first year premium and all the extra premiums and premium for accident benefit / term riders.
Things you should know
1- Surrendering term plans, which are pure protection covers with no savings element, will result in lapsation of the policy.
2- Policyholder would loses out all the benefits of the insurance policy but also receives a much lower amount than the total premium he must have paid.
3- The longer the policyholder stays invested in the policy, the greater is the surrender value factor which results in better SSV.
4- 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 9% pa. Kotak Life charge between 12%-12.5% pa.
Reference – moneylife and businesstoday