Surrender Value and Paid up Value in Life Insurance
What is the meaning of Surrender value and Paid up value in Life Insurance. How do we calculate “ Surrender value and Paid up value” of a Policy. What is the difference between these values ?
Ajay paid 3 years premium in his Endowment Policy. He then realised that this policy is not a good investment. Now, he wants to close the policy and withdraw the money. He paid Rs. 10,000 for 3 years.
Ajay thought he would get around Rs. 32,000 from his investment of Rs. 30,000 in the last 3 years. When he contacted the LIC office to surrender this policy, he had the biggest shock of his life. He was told that he will get only Rs. 6,000 if he surrenders the policy now! He will lose Rs. 24,000 of his invested amount.
How did LIC calculate this amount of Rs. 6,000?
It is called Guaranteed Surrender Value. If you surrender after paying the first 3 premium, the Guaranteed Surrender Value is 30% of the premiums paid excluding the first year premium. In the case of Ajay, he has paid only 3 yearly premiums. After ignoring the first year’s premium, he will get 30% of the next 2 premiums. This comes to 30% of Rs. 20,000 = Rs. 6,000.
To know this concept better, you must know what is Surrender value and Paid up value in insurance policies.
Surrender Value and Paid up Value – Meaning & Factors
What is Paid up value in a policy?
Suppose, Ajay wants to stop further premium in his policy, but doesn’t want to close the policy. In this case, the insurance company will give 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?
Suppose, you have paid 4 annual premiums in your 15-Year Endowment Policy of Rs. 5 Lakhs. Now, you are not interested in paying further premiums in this policy. The policy will continue to be in force for the reduced value called Paid up value. The Paid up value is given by the following formula:
Paid up value = Number of premium paid / Number of premium payable x Sum assured
In the above example, Paid up value = 4/15 x 5,00,000 = 1,33,333.
If you have paid the premium for 5 years or more, LIC will
also consider the bonus into calculation. Then the formula for Paid up value will be as follows:
Paid up value = Number of premium paid / Number of premium payable x Sum assured + Bonus credited till date
In the above example, if the premium was paid for 5 years and a bonus of Rs. 1,20,000 was credited in the 5 years Paid up value, calculation will be as follows:
Paid up value = 5/15 x 5,00,000 + 1,20,000 = 1,66,667+1,20,000 = 2,86,667.
Meaning of Paid up value?
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 future. In case of death of the policy holder before the maturity date, the nominee will get the Paid up value only. In the above example, if you are not paying further premium from 6 th year, you will get Rs. 2,86,667 on maturity date. Your nominee will get the same amount in case of your death before the maturity date.
What is Surrender value in a 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 give you the Surrender value of the policy. Surrender value is the present cash value of the Paid up value payable on maturity. The insurance company will calculate Surrender value by multiplying Paid up value with a Surrender value factor.
The policy will be cancelled after the payment of Surrender value. You will not get any other benefits from this policy later.
Conditions for Surrender
You cannot surrender all the policies. In most cases, the policy will be eligible for Surrender value only if you pay premium for at least 3 years. If you stop the policy before that, you will lose the premium paid.
Both Surrender value and Paid up value will not be attractive for the policy holders. But this option can be used to cut losses in a wrong policy which 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.
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