All you wanted to know about surrender value

Shyam comes across the term, ‘Surrender Value’ in insurance which confuses him. Shyam approaches his neighbor and insurance agent, Banerjee to discuss what surrender value means and how it applies to different conditions.

Shyam : Banerjee, can you explain what surrender value means and how is it different from maturity, survival benefit and other such terms?

Banerjee : Hold-on, try not to overwhelm yourself with too many terms. Maturity and Survival benefits accrue towards the end of term. Surrender value on the other hand, is the value the insured (soon to be uninsured) can expect when for any reason, he/she decides to discontinue the policy .

Shyam : So if one doesn’t continue with the policy, can he still expect to receive some amount? That seems generous.

Banerjee : A traditional life insurance is generally a combination of insurance and investment and the premium one pays is also split accordingly. Surrender value can be paid from such investment for policies such as endowment, guaranteed benefits plan, ULIPS and others. Plans which are solely focused on protection and not investment , term plan for instance, cannot offer any surrender value.

Shyam : How will they calculate how much to return? Also, is it discretionary or pre-determined?

Banerjee : You went from “generous” to nit-picking on details with ease my friend! Anyways, you can either be paid a guaranteed surrender value on minimum three years of premium payment or a marginally greater amount as special surrender value. If you have paid premiums for at least three full years, the guaranteed surrender value will be equal to 30 per cent of the premium paid after excluding the first year premium and any amount paid towards riders and deducting a surrender charge.

On sticking with the policy for longer than three to four years, the calculation will then be based on sum assured and bonuses and not premium paid, thus reflecting the investments made. As in, total sum assured is apportioned to the policy paid term along with the bonus accrued. The total of these two is then multiplied with surrender ratio (less than one) to arrive at the surrender value. The surrender ratio will generally increase along with the duration of the premium paid term, to incentivize staying insured.

Shyam : Useful information but I cannot fathom the reason why one would surrender a policy.

Banerjee : Yes, surrendering a policy would destroy wealth and nullify any insurance protection to the individual, it would also increase the insurance costs if purchased subsequently as the policy premium would now include age premium and inflation.

If one is faced with a financial need, one can always check for loans from the insurer which are based on the surrender value accrued. This allows for protection and also tiding over any liquidity needs that may arise.

Shyam : One must make a conscious call based on the information available to him.

Banerjee : Yes, surrender value can be checked on the insurer’s website by entering the policy details and other relevant information, which will then give an estimate of the surrender value that can be expected.

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