Surrender Value in Term Insurance: Types & How It Is Calculated (2024)

TeamAckoJul 14, 2024

One of the main criteria for an insurance policy is that it needs to be long-lasting. However, sometimes, policyholders give up the policy before the end of the policy term for various reasons. It could be encashed to meet an urgent financial need or surrendered as an outdated policy that doesn't meet their current financial needs.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, we'll talk about the surrender value of a term insurance plan, its types, how it's calculated, and which policies can be surrendered before they reach their full value

What is the Surrender Value in Term Insurance?

Surrender value in term insurance refers to the amount of money an insurance company pays to the policyholder if they decide to terminate their 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 aterm insurance policy means that the policyholder forfeits thedeath benefit, which is the policy's main purpose. Therefore, surrendering a term insurance policy should only be done after carefully considering one's financial situation and insurance needs.

IRDIA rules for surrender value in insurance

The Insurance and Regulatory Development Authority of India (IRDAI) rules say that anyone with a term plan can give up their insurance policy. However, only after the policy has been in effect for three years will the policyholder get the payout of the surrender value.

TheIRDAdecides what the policy's surrender value is for the first seven years.From the third year on, the surrender value is up to 30% of the paid premium. Between the fourth and seventh years, the surrender value could fall to up to 50% of the paid premium.

After seven years, the insurance company decides how much the premium should be.The general rule is that the closer you are to your date of maturity when you surrender, the more money and benefits you get.

How is surrender value calculated in term insurance policies?

Surrender value calculation in term insurance policies varies from one insurance company to another. Generally, the surrender value is calculated based on the following factors.

1. Policy term:The longer thepolicy term in insurance, the higher the surrender value.

2. Premium paid:The higher the premium paid, the higher the surrender value.

3. Policyholder’s age:The younger the policyholder at the time of surrendering the policy, the higher the surrender value.

In most cases, the surrender value is a percentage of the total premiums paid by the policyholder. The percentage varies depending on the policy term and the number of premiums paid. It is important to note that the surrender value is usually lower than the total premiums paid by the policyholder.

What are the types of surrender values ?

Here are the types of surrender values in insurance.

Guaranteed Surrender Value (GSV)

This is the minimum amount an insurance company pays the policyholder upon surrendering the policy. The GSV is predetermined at the time of policy purchase and is usually a percentage of the total premiums paid.

Special Surrender Value (SSV)

This amount is offered at the discretion of the insurance company, over and above the GSV. The SSV takes into account various factors such as the policy duration, the number of premiums paid, the current market conditions, and other such factors. The SSV is usually higher than the GSV, but there is no guarantee that it will be paid.

3 Common reasons policyholders 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 to surrender your term insurance policy and opt for a cheaper one in its place.

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 doesn't have any liquid cash to use, surrendering a life insurance policy may be an option.

Factors to Consider Before Surrendering the Term Insurance Policy

It's essential to consider your options carefully before surrendering active insurance. While the prospect of reducing immediate liabilities may seem attractive, sticking with the policy might often be the wisest choice. Let’s look at some of the factors to consider before surrendering.

• Future Financial Goals

• Insurance Needs

• Surrender Value

• Alternative Options

• Tax Implications

• Policy Flexibility

• Health Considerations

You can also seek advice from a financial advisor to discuss the implications of surrendering the policy and explore alternative strategies.

Wrapping Up

The surrender value gives the policyholder the freedom to leave the policy if they cannot continue with the life insurance term. How much surrender value you get will depend on your insurance company's calculations. But when you give up your insurance plan, the advantages that come with it will stop being effective. You won't have protection for money if something happens to you. It is essential to make an informed decision before surrendering your policy.

Frequently Asked Questions

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.