What is surrender value and how it is calculated

There are certain question which comes in policyholder’s mind when he thinks to surrender his existing life insurance policies such as i) Can i surrender my policy ii) Does my policy acquire surrender value. iii) If surrender value gets generated in my policy, how it is computed.

What is Surrender:

To Surrender a life insurance policy means policyholder decides to close policy before maturity. On the basis of certain calculation, life insurance company gives surrender value to policyholder.

Can I surrender my policy?

Term, Endowment and Unit Linked are three major type of life insurance plan.Term plan is pure protection plan i.e it provides benefit only on Death, whereas both endowment and unit liked plans are saving and protection plan i.e this plans provide benefit on Death, Surrender as well as maturity. Overall, you can surrender the policy if you have endowment or ulip plans for which certain conditions has to be met,whereas term plan cannot be surrendered . A policyholder must be aware about type of life insurance policy his portfolio covers.

ii) Does my policy acquire Surrender value?

Surrender value gets acquire for both Endowment and ULIP for which certain conditions has to be met. In Endowment plans, a policyholder has to pay minimum premium of 3 years to be eligible for performing surrender. In ULIP, a policyholder can surrender the policy after completion of 5 years lock-in period.

iii) If surrender value gets generated in my policy, how it is computed.

For computing surrender value, GSV and SSV are calculated. GSV stands for Guaranteed surrender value and SSV stands for Special Surrender value. GSV or SSV whichever is higher is given to policyholder on surrender. Let us see calculation of GSV and SSV.

Guaranteed Surrender Value(GSV) : A Policyholder should pay atleast 3 years premium to be eligible for surrender. Guaranteed surrender value is calculated as 30%(surrender value factor) of basic premium paid, excluding first year premium. Additional Premium which includes loading and rider premium is not considered in basic premium. Surrender value factor gets increased along with policy years.Now let us see this, with an example.

Suppose, A life assured pays premium of 60,000 rs annually. Post completion of 3 years, Total premium paid would be 1,80,000. on surrender, he will receive,30 percent of 1,20,000(total premium paid minus first year premium) i.e 36,000.

Special Surrender Value(SSV) : Special surrender value rely on four elements i.e Sum assured, policy term, no of premium paid and bonus. Special Surrender Value is calculated by multiplying addition of Paid up SA and bonus along with SSV factor i.e (paid up SA + bonus) * SSV factor. For understanding SSV, we must first understand paid up sum assured. When a policyholder stops paying premium post 3 years, his policy turns to paid up. When policy turns to paid up, sum assured gets decreases. This is known as paid up Sum assured. Surrender value factor gets increases along with policy years. This factor is different from one company to another.Let us understand SSV with an example.

For ex, If a life assured buys policy of SA 5,50,00 with policy term 10 and he paid premium of 25,000 for 3 years. Bonus of around 50,000 gets accumulated in these 3 years. SSV factor for 4th year is 30%.

Special Surrender Value = (30/100)*(5,50,000*(3/10)+50,000) i.e 64,500.

Surrender value for ULIP Plans : ULIP plans have 5 years lock in period. After completion of lock in period, a policyholder can surrender his policy. A policyholder gets Fund Value on surrender. Before five years,if policyholder stops paying premium then fund value less discontinuous charge will kept in discontinuous policy fund. A policyholder can revive his policy from Discontinuous to in-force within 3 years. If he failed to revive, he will get minimum 4% interest on discontinuous policy fund post completion of lock in period.

Disclaimer :

This article is not sponsored and not meant for endorsing any particular insurance company. Please Check Terms and Condition of respective organization along with inclusion and exclusion before buying insurance policy.