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Surrender Value in Term Insurance

TeamAckoNov 22, 2024

One of the main criteria for an insurance policy is that it needs to be long-lasting. However, there are times when policyholders choose to surrender their policy before it reaches maturity. It could be encashed to meet an urgent financial need or surrendered as an outdated policy that doesn't meet their current financial needs. In this article, you’ll learn what is surrender value in insurance, its types, how it's calculated, and which policies can be surrendered before they reach their full value.

Surrender

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What is the Surrender Value in Term Insurance?

Surrender value meaning in Term Insurance simply refers to the amount of money an insurance company pays the policyholder if the policyholder decides to terminate their Life Insurance Policy before its maturity. It applies only to those Term Insurance Policies with a surrender benefit. When a policyholder opts for surrender, the insurance company calculates the surrender value based on the number of premiums paid, the duration of the policy, and other factors.

The surrender value is usually a percentage of the total premiums paid minus any applicable charges or fees. It is important to note that surrendering a Term Insurance Policy means that the policyholder forfeits the death benefit, which is the policy's main purpose.

As a result, it’s crucial to consider one’s financial situation, future goals, and ongoing insurance needs before deciding to surrender. Using a surrender value calculator or accessing surrender value check online tools can help policyholders determine the exact amount they would receive and evaluate if surrendering aligns with their financial strategy.

What are the Types of Surrender Values?

In Life Insurance, surrender values come in two primary varieties:

Guaranteed Surrender Value (GSV): This is a pre-determined percentage of total premiums paid (excluding the first-year premium and additional riders). It becomes available after three years and is often listed in the surrender value chart or policy brochure.
Special Surrender Value (SSV): This amount is usually higher than the Guaranteed Surrender Value (GSV). It’s calculated based on factors like the policy’s sum assured, the length of the policy, any bonuses, and the total premiums paid. If you stop paying premiums, the policy can become “paid up,” meaning the sum assured is reduced according to how much you’ve already paid. When you surrender a paid-up policy, you get the special surrender value, which includes the reduced sum assured plus any bonuses accumulated.

Example Calculation for GSV

Assuming you pay ₹50,000 annually for a 20-year policy with a sum assured of ₹8 lakh. If you decide to surrender after 3 years, the GSV calculation might use a surrender value factor of 30%.

The formula for GSV:

Total premiums paid (excluding the first year) * Surrender Value Factor

Total premiums paid over 3 years (Excluding the first-year premium):

Total Premiums Paid = 50,000 * (3-1) = 1,00,000

Applying the surrender value factor (30%):

GSV = 30/100 * 1,00,000 = 30,000

So, the Guaranteed Surrender Value would be approximately ₹30,000.

Example Calculation for SSV

Suppose you pay ₹40,000 annually for a 25-year policy with a sum of ₹10 lakh. If you stop paying premiums after 5 years, and the accumulated bonus is ₹80,000, with a surrender value factor of 35%:

Formula for SSV: [Initial base sum assured * (Premiums paid/Total premiums payable) + Total bonus accumulated] * Surrender Value Factor

Calculating the proportionate sum assured based on premiums paid:

10,00,000 * 5/20 = 2,00,000

Adding the accumulated bonus to this account:

2,00,000 + 80,000 = 2,80,000

Applying the surrender value factor (35%):

SSV = 35/100 * 2,80,000 = 98,000

Thus, the Special Surrender Value would be approximately ₹98,000.

Understanding Which Life Insurance Policies Provide a Surrender Value

Not all Life Insurance policies offer a surrender value. The availability of a surrender value depends on the type of policy:

Permanent Life Insurance Policies: These include whole life, universal life, and endowment policies. They accumulate a cash value over time, which can be accessed if the policy is surrendered before maturity. The surrender value is typically a percentage of this accumulated cash value, adjusted for applicable fees or charges.
Term Life Insurance Policies: These policies provide coverage for a specified period and do not build cash value. Consequently, they do not offer a surrender value. No payout is provided if a Term Policy is cancelled before its term ends.

It's important to note that even within permanent Life Insurance, the surrender value may vary based on factors such as the policy's duration, premium payments, and any bonuses accrued. Additionally, surrendering a policy can have tax implications, especially if the surrender value exceeds the total premiums paid.

How is Surrender Value Calculated in Life Insurance Policies?

Surrender value calculation in LifeInsurance Policies varies from one insurance company to another. For permanent life insurance policies (such as whole life or endowment policies), the surrender value is influenced by the following factors:

Policy term: The longer the Policy Term in Insurance, the higher the surrender value.
Premium paid: The higher the premium paid, the higher the surrender value.
Policyholder’s age: The younger the policyholder at the time of surrendering the policy, the higher the surrender value.

Factors to Consider Before Surrendering the Life Insurance Policy

Before deciding to surrender any Life Insurance Policy, weighing the potential impacts on your financial future is crucial. While surrendering a policy can offer immediate funds, it may not always align with your long-term goals. Here are some key factors to consider before policy surrender:

Future Financial Goals: Consider whether surrendering the policy aligns with your future financial needs. Life insurance can be integral to long-term financial security, so assess if losing this coverage will impact your financial goals.
Insurance Needs: Evaluate your insurance needs. A life insurance policy provides critical financial protection to your beneficiaries in case of unforeseen events. Surrender means forfeiting this security, which may leave your dependents unprotected.
Surrender Value: Understand the surrender value of a policy before proceeding. The surrender value is typically lower than the total premiums paid, especially in the policy's early years. If you’re considering surrendering, use a surrender value calculator to determine the amount you would receive.
Alternative Options: Explore alternatives to full surrender. Options like making the policy paid up (stopping premium payments but reducing coverage) allow you to retain some benefits without additional costs. Consider if paid up value or a policy loan is more beneficial than surrendering.
Tax Implications: The surrender value may be taxable, as it is often classified as “income from other sources.” Ensure you are aware of the tax implications associated with surrendering your policy to avoid unexpected liabilities.
Policy Flexibility: Some policies offer flexibility options, such as premium holidays or reduced coverage. Check if your policy has these features, as they may provide temporary relief without requiring a full surrender.
Health Considerations: Obtaining a new policy may be feasible if you are healthy. However, securing a new policy could be costly or challenging if health changes occur. Weigh these factors carefully before ending your current coverage.
Financial Advice: Consulting a financial advisor can provide personalised insights into whether surrendering the policy aligns with your financial strategy. Advisors can help assess the surrender value in insurance and explore other strategies that may benefit your situation more.

These factors highlight the importance of making an informed decision when considering a policy or any Life Insurance Surrender. By carefully assessing your needs and goals, you can ensure that your choice aligns with both your present and future financial security.

IRDAI Rules for Surrender Value in Insurance

The Insurance Regulatory and Development Authority of India (IRDAI) has established guidelines regarding the surrender value in insurance policies, aiming to balance policyholder interests with insurer stability. While specific surrender values may differ based on the insurance provider and policy, IRDAI ensures that the following general principles apply:

Initial Three-Year Period

Policyholders can Surrender a policy after a certain period to receive the Life Insurance Surrender Value. This means, policies must remain active for at least three years before a surrender value becomes available. Surrendering within this timeframe typically results in no payout, aligning with IRDAI’s goal to discourage premature policy termination.

Surrender Value Structure

For policies surrendered within specific periods, IRDAI has structured percentage-based values to protect policyholders while considering the insurer's financial stability. The guidelines, effective from April 1, 2024, establish the following percentages:

If surrendered in the second year, 30% of the total premiums paid will be returned.
If surrendered in the third year, 35% of the total premiums paid will be given.
If surrendered anytime from the fourth to the seventh year, 50% of the total premiums paid will be returned.
If surrendered within the last two years before maturity, 90% of the total premiums paid will be provided.

Impact on Returns

The finalised rules aim to maintain the Internal Rate of Returns (IRRs) for policyholders by avoiding overly high surrender values in the initial years, which could lead to lower returns on policies.

Guidance on Non-Linked Policies

IRDAI mandates that Non-Linked Policies offering savings plans must guarantee survival and maturity benefits. These benefits ensure that policyholders receive positive returns, enhancing the surrender value. Policies without a return of premium clause must maintain minimum values to protect policyholders’ savings.

Enhanced Disclosure Requirements

To ensure transparency, IRDAI requires insurers to disclose surrender value calculations and potential charges at the policy outset, allowing customers to make well-informed decisions. This transparency benefits customers looking to understand how to check surrender value of a policy and anticipate future returns.

Paid-Up Sum Assured Option

IRDAI regulations allow policies to convert to a paid-up value for policyholders unable to continue premium payments. This means the policy remains active with a reduced sum assured based on the premiums already paid. The paid-up value is calculated proportionally, ensuring partial benefits without requiring further payments.

Policy Maturity Benefits

Policies surrendered closer to maturity yield higher payouts, often up to 90% of total premiums paid in the final two years. This high payout percentage incentivises policyholders to retain their policies longer, potentially aligning with the policy surrender value chart.

Specific Rules for Linked Policies

IRDAI specifies that linked policies must adhere to the Linked Insurance Products Regulations, 2013, ensuring that surrender values align with broader regulatory standards.

3 Common Reasons Policy Holders Surrender Their Policy

When you think about all the different ways you can use the cash value in your Life Insurance, you might wonder when it's best to turn in your policy for cash. Here are some situations in which this might make sense.

A Better Insurance Policy

Even though Life Insurance premiums usually increase with the age of the policyholder, there could be a chance that one might be able to get a policy with a better sum insured or a bonus. Surrendering one policy to get another better one in its place is one of the common reasons for people to surrender the policy.

Unable to Afford Premiums

Sometimes, emergencies require extra monthly expenditures, making insurance premiums unaffordable. The only option left is surrendering your Term Insurance Policy and opting for a cheaper one.

Need a Large Amount of Money for an Unexpected Event

If a policyholder has a big expense to pay or a better investment opportunity but no liquid cash to use, surrendering a life insurance policy may be an option.

Wrapping Up

The surrender value provides policyholders the flexibility to exit their Life Insurance policy if they are unable to continue with premium payments. The amount of surrender value you receive depends on the insurer's calculations, typically based on the premiums paid, policy term, and any accumulated bonuses. However, surrendering your policy means forfeiting all associated benefits, including the death benefit, which provides financial security to your beneficiaries.

When you surrender an ACKO policy or any life insurance plan, you no longer have coverage in case of unexpected events, leaving your dependents without financial protection. Therefore, it’s crucial to carefully evaluate your financial situation and insurance needs before deciding to surrender. Consulting a financial advisor. Even using a surrender value calculator can help you make an informed choice.

Frequently Asked Questions

Here are the answers to the questions related to the decoding surrender value in term insurance

What is the GSV full form?

GSV stands for Guaranteed Surrender Value, which is the minimum amount you receive if you surrender your policy before maturity. It is generally available after three years of premium payments.

Should I Surrender My Life Insurance Policy?

Deciding whether to surrender your policy depends on your current financial needs, the surrender value offered, and the insurance benefits you’d lose. Consider alternatives like a loan against the surrender value of the policy to maintain coverage without fully surrendering.

When is the Right Time to Surrender a Policy?

The optimal time to surrender any Life Insurance policy is usually after surrender charges have been reduced, often several years into the policy. Surrendering is also considered if the policy no longer aligns with your financial goals or becomes unaffordable.

Are there Alternatives to Surrendering a Policy?

Yes, alternatives include taking a loan against the surrender value or making the policy paid-up to retain some benefits. You can also check your surrender value calculator or access surrender value check online tools to explore options.

Does Term Insurance have a surrender value?

Most Regular-term Insurance Policies don’t offer a surrender value since they don’t include a savings component. If you surrender a Term Policy, it typically ends without any payout.

What is the new rule for surrender value?

The new rule states that Special Surrender Value (SSV) must be calculated to ensure it at least equals the present value of the paid-up sum insured and any accrued benefits. This includes future benefits, bonuses, and any already-paid survival benefits.

How much are the surrender charges?

Surrender charges can start at 10% in the first year and usually reduce each year. By year 10 or later, most policies have no surrender charges.

What is the total surrender value?

The total surrender value is the guaranteed cash value plus any accumulated bonuses or dividends. For policies like Universal Life, it’s the current cash value minus any surrender charges, which typically reduce over time (often disappearing after 10-15 years).

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet, and is subject to changes.