Surrender Value & Paid-up Value in Life Insurance Policies

Akash paid 3-years premium toward his Endowment Policy. He then realized that his policy was not an ideal one in terms of investment and he intends to close the policy and withdraw the money paid to date.

Akash had paid Rs. 10,000 for his policy over the past 3 years.

When Akash 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 surrendered the policy now! (We will see later how the amount was calculated)

This meant that Akash would lose Rs. 21,000 of his invested amount during the surrender.

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?

Table of contents

1.)Surrendering VS Cancelling
2.)What is the surrender value of a policy?
3.)How Surrender Value is calculated?

• What is the guaranteed surrender value in life insurance?
• What is the special surrender value in a Life Insurance policy?

4.)What is Surrender Charge?
5.)Difference Between Surrender Value and Paid upPaid-up value

• What are the key differences between Surrender value and Paid Up value?
• What is Paid up the value of the LIC policy?
• How to calculate the Paid up value in a policy?

6.)What does it mean for an insurance policy to be paid up?
7.)Conditions for Surrender
8.)How did LIC calculate the amount of ₹.9,000?
9.)Surrender Value of LIC Policy – Call Helpline

• Can LIC Policy be surrendered?
• Should I surrender my LIC Policy?
• Is the cash surrender value taxable in the LIC policy?

10.)Which is a better choice: To Surrender or Not to Surrender?
11.)Conclusion

1. Surrendering VS Cancelling

There are instances where you may be well-versed in a subject but are often confused about some basic terms.

What is the difference between canceling and surrendering an insurance policy?

The reply is that surrendering and canceling an insurance policy are the same and equivalent actions.

How to Cancel Your Life Insurance Policy?

Surrender Value vs Cash Value vs Cash Surrender Value

• Is cash value the same as surrender value?

The amount of money you can access while you’re still living and that builds up over time from your premium payments is known as the cash value of a life insurance policy. The amount you get, usually after deducting fees and penalties, if you choose to cancel your insurance before it matures or before the insured event happens is known as the surrender value.

• What is a cash surrender value?

The cash surrender value of a life insurance policy is the amount of money that the policyholder will receive if they cancel the policy before it matures or the insured person dies. It’s essentially the accumulated savings portion of your permanent life insurance policy, like whole life or universal life insurance. Term life insurance policies typically don’t have a cash surrender value.

2. What is the surrender value of a policy?

The surrender value of a policy is the amount of cash value a policyholder 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 policy will be canceled after the payment of the Surrender value in insurance. Also, you will not be entitled to receive any other benefits from this policy later date.

3. How Surrender Value is calculated?

Surrender Value in insurance is calculated based on the number of premiums you have paid.

1. You need to calculate the paid-up value.
2. Based on the paid-up value, you will get either a guaranteed surrender value or a special surrender value from the insurance company.

What is the guaranteed surrender value in life insurance?

Guaranteed Surrender Value also known as the Guaranteed Cash Value in insurance is the minimum amount that will be provided by the insurance company if the policyholder leaves/terminates the policy in between the policy period.

As per the rules,

• Guaranteed surrender value is acquired when the policyholder has paid a minimum 3 years premium if the term of the policy is 10 Years or more.
• If the term of the policy is less than 10 years then the guaranteed surrender value is acquired if the policyholder has paid a premium for 2 years.

The minimum guaranteed surrender value in life insurance is 30% of the premium value if an individual surrenders the policy between 2-3 years
What if somebody surrenders the policy between 4-7 years?

It is 50% of the premium value in case one surrenders the policy between 4-7 years.

What is the special surrender value in a Life Insurance policy?

As the name suggests, the ‘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.

4. What is Surrender Charge?

A surrender charge is the total amount of charges that 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.

When are Surrender Charges applicable?

These surrender charges have been considered for a traditional policy having a policy term of 10 years or more.

5. Difference Between Surrender Value and Paid up value

What is the Paid-up value of the LIC policy?

Let’s suppose that Akash 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 policyholder (Akash) the 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.

What are the key differences between Surrender value and Paid Up value?

Surrender Value	Paid-up value
1. Policyholders may decide to surrender their policies for various reasons, such as financial difficulties, changing insurance needs, or dissatisfaction with the policy.	Policyholders may choose the paid-up option if they can no longer afford to pay premiums but still want to maintain some level of life insurance coverage.
2. Surrender value is the amount that an insurance policyholder is entitled to receive from the insurance company if they choose to terminate or surrender their policy before its maturity or before the specified term.	Paid-up value is an option that allows the policyholder to stop paying further premiums while keeping the policy in force. The policy becomes “Paid-up,” meaning it is converted into a reduced Paid-up insurance, and the Death Benefit is adjusted accordingly.
3. The surrender value is typically less than the total premiums paid because insurance companies may deduct various fees, charges, and expenses.	The paid-up value is calculated based on the premiums already paid and the accumulated cash value, if applicable. The paid-up value will be lower than the original Death Benefit, but the policy remains in force with a reduced coverage amount.

How to calculate the Paid-up value of a LIC 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.

i) The Paid-up value is calculated using the following formula:

( Paid-up value = Number of premiums paid / Number of premiums payable x Sum assured

In the above example, Paid-up value = 4/15 x 500,000 = 133,333. )

There are two different cases to consider here,

If you have paid the premium for 5 years or more, the insurance company will also consider the bonus amount in the calculation

ii) Then the formula for Paid-up value will be as follows:

Paid-up value = Number of premiums paid / Number of premiums payable x Sum assured + Bonus credited to date

If the premium was paid for 5 years and a bonus of Rs. 120,000 was credited in the 5 years Paid-up value,

iii) Then the formula for Paid-up value will be as follows:

Paid-up value = 5/15 x 500,000 + 120,000 = 166,667+120,000 = 286,667.

iv) what is reduced Paid-up?

Most life insurance plans offer a “reduced paid-up” option, where you can stop paying premiums and still have some death benefit protection, but it will be a smaller amount than the original coverage. This option is common in term return of premium and whole-life policies.

v) How to make LIC policy Paid-up?

Your LIC policy automatically becomes Paid-up if you have:

Paid premiums for at least 3 years: Your Paid-up value is a proportionate amount of the original death benefit based on the premiums paid.

Policy duration is less than 10 years: You must have paid premiums for over 2 years for automatic conversion.

You can request a Paid-up value conversion before the policy lapses for non-payment of premiums. Contact your nearest LIC branch or contact LIC customer care to initiate the process.

6. What does it mean for an insurance policy to be paid up?

In the above example, if you are not paying further premiums from the 6th year, you will get Rs. 2,86,667 on the maturity date.

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 the future.
• In case of the death of the policyholder before the maturity date, the nominee will get the Paid up value only.

• Your nominee will get the same amount in case of your death before the maturity date.

7. 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 a 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 a premium for a minimum of 2 years. If you stop the policy before that, you will lose the premium paid.

The Brutal Truth

“Both Surrender value and Paid-up value will not be attractive for the policyholders”.

But still, why should you surrender your policy?

The surrender option can be used to cut losses in the wrong policy that 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.

Now let’s come to the opening example that was left uncompleted, how did LIC calculate the Surrender Value of Akash?

8. How did LIC calculate the Surrender Value amount of ₹.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 premiums, the Guaranteed Surrender Value is calculated at the rate of 30% of the premiums paid to date.

In the example cited earlier, Akash 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.

9. Surrender Value of LIC Policy – Call Helpline

How to calculate LIC Policy Surrender Value? IIf you are still confused about how to get LIC Policy Surrender Value, don’t worry. IVRS or Integrated Voice Response System is available at all times (24×7) in most cities and is providing required information to customers.

Any customer can contact LIC IVRS by dialing Universal Access Number (UAN) 1251.

For making local calls 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 the LIC policy.

• Can LIC Policy be surrendered?

“Fourfold increase in the number of Surrendered LIC policies in 2021-22”

Yes, the LIC policy can be surrendered. Traditional policies of any insurance company can be surrendered including LIC, ICICI Prudential Life Insurance, HDFC Life Insurance, or Max Life Insurance.

• How can i surrender my LIC policy?

Please refer to “Surrender Form of LIC -Revealed with Process!” 

• 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.

• Is the cash surrender value taxable in the LIC policy?

If you have paid 2 years of premium in a traditional policy, the cash surrender value is not taxable in an LIC policy.

10. Which is a better choice: To Surrender or Not to Surrender?

When a consumer surrenders a policy,

• He forfeits all of the program’s advantages and receives far less money than the premiums he has previously paid.
• In ULIPs specifically, the investor loses a significant portion of the premium paid in the initial years, the majority of which is directed to the agent’s commission and other costs, with only the remaining portion going to the fund.

Therefore, it is wise to surrender endowment insurance only when the proceeds may be invested in another product that will yield higher returns than the original policy until the conclusion of its term.

11. Conclusion

As we have discussed before, you can use the surrender option to reduce your losses if you bought the wrong policy.

You can make up the loss if you spend the additional premiums on profitable options.

If not, be content with the 4-5% returns from conventional insurance, such as the interest you receive on your savings account.

Instead of searching for information on surrendering your policy on social media sites like Facebook, Quora, Twitter, etc,

It is better to consult a professional financial planner who can provide you with a piece of clear information on whether to surrender your policy now or not.

If yes, then you can discuss and figure out a comprehensive financial plan that compensates for the loss incurred.