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 surrenders the policy now! (We will see later how the amount was calculated)
This meant that Akash will 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
- What is the guaranteed surrender value in life insurance?
- What is the special surrender value in a Life Insurance policy?
- Can LIC Policy be surrendered?
- Should I surrender my LIC Policy?
- Is the cash surrender value taxable in the LIC policy?
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.
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.
- You need to calculate the paid-up value.
- 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 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 is Surrender Charges applicable?
These surrender charges have been considered for a traditional policy having a policy term of 10 years or more.
5. Surrender Value and Paid-up Value – Difference
What is 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.
How to calculate the Paid up value in a 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.
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 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
If 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?
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.
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.
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.