Computation of Benefits, Surrender value, Paid up value

12th July 2021 0 By indiafreenotes

A life insurance plan is an effective financial tool to secure your loved ones’ future financial interests. It helps you safeguard your family at a time when you are not physically present to do so yourself. You can choose a sum assured and premium as per your income and expenditure and add suitable riders to enjoy an enhanced cover.

The surrender value is the actual sum of money a policyholder will receive if they try to access the cash value of a policy. Other names include the surrender cash value or, in the case of annuities, annuity surrender value. Often there will be a penalty assessed for early withdrawal of cash from a policy.

The process through which you access your cash surrender value varies based on the policy you have, but many require that you cancel the policy before accessing the funds. Even if this is the case, it may be possible to take a loan out against the cash value in your policy.

Cash surrender value is defined as the internal value of an insurance policy at any point that is equal to the value of the accumulation account minus a surrender charge. Surrender charges gradually reduce to zero after a specified time, such as after the first 10 years of the policy’s life. Cash surrender value is the sum of money an insurance company pays to a policyholder or an annuity contract owner if their policy is voluntarily terminated before its maturity or an insured event occurs. This cash value is the savings component of most permanent life insurance policies, particularly whole life insurance policies. It is also known as “cash value” or “policyholder’s equity.”


Special surrender value: The special surrender value largely depends on the paid-up value and the surrender value factor of an insurance plan. The paid value refers to the reduced sum assured of your plan. This happens if you stop paying your premiums after 2 years, and you can continue the policy with a sum assured that is reduced. This reduced value is paid value. The paid-up value is calculated with the following formula:

Paid-up value = Sum assured x (Total number of premiums paid/Total number of premiums payable)

Guaranteed surrender value: As the name suggests, this is the guaranteed amount of money that the insurance company pays you when you surrender your plan. The guaranteed surrender value is specified on the policy document signed by you and the insurer at the time of purchasing the policy. The guaranteed surrender value can increase with the number of years you stay invested in the plan. So, the closer you surrender towards the maturity date, the more money you can get back.

Surrendering your policy can have consequences in both the short and long term, such as:

You lose your invested money: Although you are paid the cash surrender value, the money that you invested is lost. The surrender value is calculated depending on the premiums you have paid to the insurer and the bonus accrued till the time of surrender. This is less than the sum assured or maturity benefit that you would have received at the time of maturity.

You lose the death benefit: If you choose to surrender your insurance plan, the death benefit will be removed. This means that in the unfortunate event of your demise, your family will not be able to claim a settlement from the insurance provider.

You lose out on tax benefits: A life insurance plan does not only support your loved ones in their hour of need but also helps you save money by offering you tax benefits. If you surrender your policy, you can no longer enjoy these tax benefits.

You pay discontinuation charges in ULIPs: In the case of a ULIP, if you surrender your plan before the lock-in period is over, you will also have to pay a discontinuation charge to the insurance provider. However, if you surrender the plan after the lock-in period, the surrender value will be the same as the fund value at the time of surrender.

Paid up value

Paid-up value is the reduced sum assured paid by the insurance company if a policyholder fails to pay premiums after a certain period. Paidup value is the reduced amount of sum assured paid by the insurer in case of discontinuation of the payment of premiums after paying the full premiums for the first three years. Typically, endowment plans acquire paid-up value if the premiums are paid for three years. The paid-up value increases if the policyholder continues to pay the premiums. If for some reason the policyholder fails to pay the premium after the first three years, the paid-up value will remain the same. If the premiums are not paid, no further bonus would be added to the policy. If the policyholder dies, the insurer will pay only the paid-up value of the policy as death claim. If the policyholder continues to hold the policy, he will get the paid-up value at the end of the term. The policyholder also have the option of surrendering the policy before that. If you do not want to continue the policy, it is always better to surrender the policy.

Paid-Up Value = [ (No. of paid premium X Sum Assured) / Total No. of premium]