What is paid-up value in insurance?

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What is paid-up value in insurance?
Paid-up value in the insurance parlance refers to lowered sum assured value that is paid by the insurer in case the insured discontinues premium payment after 3 policy years. Conventional insurance products, including whole life insurance plans, endowment plans and money back policies acquire paid-up value automatically after premium towards them are paid for a continuous of three years from the policy commencement date. However, in a case when the policyholder continues to pay the premium, paid-up value for the policy increases on an annual basis.

Death Benefit equals paid-up value in case premium payment is discontinued after 3 policy years

If the policyholder pays premium for only first three years then no further bonus is provided and the paid-up value shall remain the same throughout the policy term. So, in a case when the policyholder wishes to hold on the policy till its maturity term, he/she shall be entitled to only the paid-up value. Also, in case a death claim is made, nominee shall be paid only the paid-up value.

Other benefits or riders associated with the policy cease

Paid-up policy with sum-assured restricted to the paid-up value ceases to provide all the associated benefits such as critical illness rider etc. opted with the policy plan.

Illustration to explain paid-up value: In case you have purchased a policy with a cover of Rs. 5 lakh with a maturity term of say 10 years and you pay premium towards it for just 5 years of Rs. 10,000 on an annual basis. On assuming that a total bonus of Rs. 20,000 was credited for the term for which the premiums were paid. Then, the paid-up value for the policy shall be computed using the following formula:

Paid-up value = [(Number of premiums paid / Total premiums payable * Sum assured) + bonus credited till the policy is paid)]

So, in this case paid-up value comes in at Rs. 2,70,000 {(5/10*5,00,000) + 20,000}.

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