What is the Surrender Value of Life Insurance?
Life insurance is one of those must-have financial tools that gives you a feeling of security and peace of mind. But let’s be real, life happens, and sometimes you might find yourself wanting to ditch your life insurance policy before the end of its term for whatever reason. Whether it’s a change in your financial situation or just a need for something that fits you better, surrendering your policy can be an option. When a life insurance policy is surrendered, the policyholder can get a surrender value. So, what’s the deal with life insurance surrender value, how it is calculated, and the implications of surrendering a life insurance policy? Let’s break it down.
What is Surrender Value in Life Insurance Anyway?
When you decide to surrender your life insurance policy, you’re basically cashing it in before it matures. The surrender value is the amount of money you’ll get back from your insurer based on the savings and earnings built up in your policy. Keep in mind, though, that when you surrender, you lose all the benefits tied to that policy like the death benefit and any bonuses. Most insurers will take out a surrender charge based on your plan’s terms. And here’s a little nugget of wisdom: according to the Insurance Regulatory and Development Authority of India (IRDAI), if you surrender your policy after five years, they can’t hit you with a surrender fee. Sweet, right? Not every life insurance policy has a surrender value, so it’s important to check if yours does.
Types of Surrender Values in Life Insurance
There are two primary types of surrender values that policyholders should be aware of:
A. Guaranteed Surrender Value (GSV)
This is a minimum guaranteed amount of Surrender Value payable to the policyholder on surrender of the policy. This amount is usually mentioned in the brochure and is payable after the life insurance policy completes 3 years. It is calculated by adding all the premiums paid during the policy period, while excluding the first-year premium, rider premiums and any other bonuses you may have got upon the policy maturity. It is the product of the total premiums paid and the surrender value factor (which is a percentage of total premiums paid).
B. Special Surrender Value (SSV)
This surrender value depends on various factors such as total sum assured, premiums paid, policy terms, bonuses etc. As per the new IRDAI rules, policyholders can now get a payout if they exit their policy after completing one year. Earlier, no payouts were given if they exited within the first year. This provision can be applied if the policyholder has paid the full premium for the first year.
To understand what special surrender value is, it is important to know what paid-up policy is in life insurance. For example, if a person purchased a life insurance policy but was not able to pay the premiums, the policy converts into a paid-up policy where the sum assured is reduced based on the total premium paid so far. Now, when a policyholder surrenders this paid-up policy, the policyholder receives a Special Surrender Value. The special surrender value they get will depend on the paid-up value and a surrender value factor.
How to Calculate Surrender Value?
Here is a summary of how the different types of surrender values are calculated:
1. Guaranteed Surrender Value (GSV): Total premiums paid (excluding 1st year premium, bonus on maturity, rider premiums) x Surrender value factor. This is generally mentioned in the product brochure.
2. Special Surrender Value (SSV): [Initial base sum assured x (Premiums paid - Premiums payable + Bonus)] + Surrender value factor.
Key Factors Affecting Surrender Value
While calculating the surrender value of a life insurance policy, the following factors should be looked at:
1. Type and features of the policy: Policies having an investment component (such as endowment plans or unit linked insurance plans) are eligible for giving out a surrender value. Term plans do not give any surrender value as they do not have any investment component in them.
2. Time: A policy held for a longer period of time has chances of giving a higher surrender value, as this value is directly dependent on the policy duration.
3. Accumulated policy value: This value should be used as a foundation for surrender value. This includes premiums paid, interest earned, and any additional benefits.
4. Accumulated bonuses: The surrender value can be higher if the policy has any accumulated bonuses. Bonuses are rewards that are given to policyholders based on the company’s performance. They can be in the form of cash or benefits. Generally, policies with consistent accrued bonuses give higher surrender values, compared to those which don’t.
5. Premium paid: Premium paid for your policy has a direct relation with the surrender value you would be getting. If a higher amount of premium is paid for the policy, it will result in a higher surrender value.
6. Current market conditions: Surrender value also depends on current market conditions (such as investment performance, interest rates, etc.). Further, market dynamics can affect the overall value of the policy.
7. Age of the policyholder: Generally, if the policy starts at a younger age, then surrender value can be higher when it is surrendered later on in the policy period. The logic is when you get covered while you are young, the policy duration is higher.
8. Surrender fees: A surrender fee may be imposed on life insurance policies, which will directly impact the surrender value. Try to go for policies that have low surrender fees.
Why Do Policyholders Surrender Their Policies?
Here are some reasons why a policyholder may choose to surrender their life insurance policy:
1. Discovery of a better choice: Consumers may get more financially educated or they may do more research, post which, they discover a better life insurance plan that is giving them better benefits and feel that taking up this alternative is better than continuing with their existing plan. So, they surrender and go for the other plan.
2. Inadequate needs: The life insurance plan does not meet their needs adequately, such as the life cover offered is not adequate for them or maybe the policy duration is too short for them.
3. Financial emergencies: They have a financial emergency due to which they want to liquidate or cancel their life insurance policy. Surrendering the policy will remove the task of paying future premiums for it. Further, the surrender value can give quick cash to them, which can help them in meeting their financial emergency.
4. Evolving life insurance needs: Their life insurance needs have evolved and they feel that their current life insurance is not able to keep up. For example, a policyholder may have got married and they may have felt that the existing life cover is no longer enough for their financial dependents, due to which the policyholder decided to surrender the policy and buy a new one.
5. Change of financial goals: People may choose to surrender their life insurance policy if it doesn’t fit well with their current financial plan. For example, if a person is currently looking for a life insurance policy that offers the benefits of life cover and investment, they may surrender their current term plan and go for a unit linked insurance plan (ULIP).
6. Changing lifestyle: A changing lifestyle may also lead to surrendering of a life insurance policy. For example, if a couple chooses to divorce, then they may think about surrendering their joint life insurance policy.
Do All Life Insurance Policies Include a Surrender Value?
All life insurance policies do not have surrender value, only life insurance policies with an investment component have surrender value (such as endowment plans or unit linked insurance plans). Term insurance plans, which do not have any investment component, do not offer any surrender value.
Further, the policyholder should carefully read their policy documents to understand the conditions under which they will get the surrender value.
Understanding Surrender Value Fees in Insurance
Surrender value fee is a charge that your insurer may impose when you surrender the policy before its maturity. Further, this fee can impact your surrender value. These charges are the highest during the early years of the policy and gradually decrease over time.
When is the Right Time to Surrender Your Life Insurance Policy?
There is no right time to surrender your policy. If you feel that you can no longer keep up with your existing life insurance policy under any circumstances, then you may want to look at surrendering it. Before you surrender your policy you should think about the advantage and disadvantage of doing the same. The advantage is that you no longer have to maintain your policy and pay premiums for it. The disadvantage is that you will lose all your policy benefits. Further, your surrender value may get impacted because of the surrender fee.
Is Surrendering My Insurance Policy a Good Decision?
When a policyholder surrenders a life insurance policy, they will receive a surrender value but they will lose all the policy benefits. When you try to buy a new life insurance plan later on, your premiums may increase as you may have aged. So, it’s best to choose a life insurance plan that meets your needs, so that you can avoid surrendering your policy.
However, if there are circumstances (such as urgent financial requirement) which compel you to surrender your policy, then you can do the needful.
FAQs
Q1. What is the meaning of surrender value in life insurance?
It is the amount of money your insurer pays when you surrender, that is discontinue your life insurance plan before its maturity.
Q2. How is the Surrender Value of a Life Insurance Policy Calculated?
Here is how life insurance surrender value is calculated:
1. Guaranteed Surrender Value (GSV): Total premiums paid (excluding 1st year premium, bonus on maturity, rider premiums) x Surrender value factor.
This is generally mentioned in the product brochure.
2. Special Surrender Value (SSV): Initial base sum assured x (Premiums paid - Premiums payable + Bonus) + Surrender value factor.
Q3. What is an example of a surrender value?
Let’s assume you had bought a life insurance policy and paid Rs. 10k premium yearly for 5 years. In the 6th year, you choose to surrender your policy. Assume you will get the guaranteed surrender value for your policy and the surrender value factor is 0.6. In this case the surrender value will be:
Rs. 40,000 (this excludes first year premium, rider premium and bonuses) x 0.6 = Rs. 24,000.
Q4. How Much Will I Receive if I Surrender My Policy After 3 Years?
This will depend on your policy.
Disclaimer: HDFC Life Insurance Company Limited (“HDFC Life”). CIN: L65110MH2000PLC128245, IRDAI Reg. No. 101. Registered Office: Lodha Excelus, 13th Floor, Apollo Mills Compound, N.M. Joshi Marg, Mahalaxmi, Mumbai 400 011. Email: [email protected], Tel No: 022-68446530. Available Mon-Sat from 10 am to 7 pm. The name /letter 'HDFC' in the name/logo of HDFC Life Insurance Company Limited (HDFC Life) belongs to HDFC Bank Limited and is used by HDFC Life under licence from HDFC Bank Limited. ARN: ST/02/25/21079
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