Life insurance policies are long-term financial products. Besides pure protection plans, there are other products offered by insurance companies that come with savings or investment component involved. Savings plus protection plans offered by insurance companies such as endowment plans, money-back policies and unit-linked investment plans (ULIPs) are purchased with an objective of availing protection and building wealth for future. However, sometimes you may have to liquidate the investments made for your long-term goal for various reasons such as financial hardship, change in investment preference and plans of investing in a better alternative. Terminating the insurance plans before its maturity is termed as surrender. Are you wondering what will happen on surrendering the insurance policy? Not to worry! Here is everything that you need to know.
What is the surrender value?
Every insurance policy acquires a surrender value on completion of a certain specific period. So, what is the surrender value?
Surrender value if the sum of money that is payable by the insurance company when you terminate your insurance policy before its maturity. Generally, most of the traditional insurance plans can be surrendered for cash after completion of three policy years. That means policy acquires surrender value on completion of the first three years.
Understanding the surrender value in traditional insurance policies
When you surrender the policy after completion of three years, higher of the guaranteed surrender value or special surrender value will be paid in case of traditional policies.
Types of the surrender value
There are two types of surrender value called Guaranteed surrender value and a Special surrender value
- Guaranteed surrender value: The amount of money guaranteed to be payable by the insurance company on surrendering the insurance policy before completion of maturity. Guaranteed surrender value is determined based on the surrender value factor specified in the policy document. The surrender value factor is the percentage of total premiums paid. Surrender value factor increases with the number of years of the policy. Surrender value factor will get close to 100% of premiums paid when the policy nears maturity.Hence, the guaranteed surrender value is calculated as total premiums paid multiplied by the surrender value factor.
- Special surrender value: Special surrender value is usually higher than the guaranteed surrender value. However, it depends on the insurance company. Special surrender value depends on the sum assured, premiums paid, policy term and bonuses. Generally, special surrender value is calculated,Special surrender value = (Paid-up value + accrued bonuses) X surrender value factor
Where paid-up value = Basic sum assured X (Number of premiums paid/Number of premiums payable)
Understanding the surrender value in unit-linked investment plans
Unit linked investment plans are insurance products that come with savings and insurance component. ULIPs are structured differently than that of traditional insurance plans. ULIPs invest in various financial instruments such as equity and debt through various fund option. ULIPs come with five year lock-in period.
- Surrendering the ULIP plans before the lock-in period involves discontinuation charges. The surrender value will be equal to fund value on the date of surrender after deduction of discontinuation charges
- Surrendering the ULIP plans after the lock-in period involves no charges. Hence, the surrender value will be equivalent to fund value on the date of surrender
The surrender value of life insurance policy can be calculated easily using an effective online tool called surrender value calculator. You can access the surrender value calculator online on the website of an insurance company. You need to provide some of the basic information to calculate the surrender value instantly. All you need to provide is your contact details, plan name, policy term, number of premiums paid, premium payment mode, premium instalment amount and number of years the policy has completed. Once you submit the details, the surrender value calculator instantly calculates your policy’s surrender value.
What do you stand to lose on surrendering the life insurance policy?
When you surrender the insurance policy before its maturity for whatever reason, you stand to lose on certain benefits. Following are the benefits that you devoid by seeking premature termination or surrender of policy:
- As soon as you surrender, your risk cover benefit will cease
- Calculation of surrender value considers premium paid and in certain case bonuses but only up to the extent of surrender value factor. Hence, you will partially lose out on whatever you have already invested
- You will lose on the yearly tax benefits that you receive on premium payment
As you lose out on many benefits, consider surrendering the insurance policy only if the decision makes a financial sense.
Frequently Asked Questions (FAQs)
- What is the free-look period in life insurance policies?Free-look period is the time given by the insurance company to its new policyholder to terminate the insurance contract without any penalties if they are not satisfied with the terms and conditions of the policy. However, even if you are cancelling the plan within the free look period, it’s important to provide the proper reason for rejection.
- What does ‘paid-up value’ in insurance mean?Paid-up value is the proportionally reduced amount of sum assured when you discontinue making the premium payment. However, when the policy is converted in to paid-up policy, policy will stay in force till maturity even without paying a premium but with reduced sum assured.
- What is the fund value in unit-linked investment plans (ULIPs)?The fund value is the value of a number of fund units held in your policy. ULIPs invest a portion of your premium into various funds.
- What are the documents that you need to provide for surrendering the life insurance policy?The requirement of documents may depend on the type of policy you have purchased. However, some of the common documents required for surrender are:
- Policy surrender form duly filled and signed
- The original insurance policy document
- Bank details with cancelled cheque leaf to receive the payment
- Pan card
- Address proof
- Does term insurance has a surrender value?No. Term insurance being the pure form of insurance that offers no savings element has no cash surrender value benefit to offer.