How is the surrender value for an insurance policy computed?

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How is the surrender value for an insurance policy computed?
Surrendering your endowment life insurance policy for meeting some urgent financial needs. Know how much will you realize or what shall be the surrender value for the policy in the article. The provision for surrender on life insurance policy is generally allowed after continuous premium payment for three years.

Revised surrender value norms

With the new IRDA norms in place for life insurance policies, a policyholder can surrender the policy with a premium payment tenure of over 10 years after paying premium for 3 policy years. For policies with lower premium payment tenure, the life insured can request for surrender of the policy after 2 policy years.

For an endowment insurance policy, the policyholder is entitled to receive a minimum or a guaranteed surrender value or S.V of 30% of the total premium amount paid towards the policy including the first policy premium which until was not included in the calculation of surrender value. With this the guaranteed S.V now stands at 30% of the total premium paid.

Payable S.V:

Policyholder is entitled to receive a sum higher of the guaranteed sum assured value (pegged at a minimum of 30% of total premium paid including the first year policy premium) and special surrender value. Undoubtedly, the guaranteed sum assured value is way below but the insured generally receives a higher sum which is the special surrender value.

Payable S.V or the special surrender value is the discounted value of the paid up value of the policy. Or, total paid value multiplied with a multiplier called the surrender value factor.

To know about paid up value of the policy, click here. Paid-up value = [(Number of premiums paid / Total premiums payable * Sum assured) + bonus credited till the policy is paid)]

In some of the cases, paid up value of the policy also includes the bonus payable. So, given the paid up value and the bonus, payable S.V is computed using the following formula -

S.V= (Paid-up value + Accrued bonus on premium payment towards the policy for a certain no. of years) * Surrender value or discounting factor,

where the surrender value or discounting factor varies from insurer to insurer. And is determined based on the number of factors that include policy type, term, performance of the fund in case o9f with-profit participating insurance policies and premiums paid. The factor which is a percentage of the paid-up value and accrued bonus, for the first three policy years is equivalent to zero and thereafter increase in value.

Surrender value in case of ULIPs or Unit-Linked Insurance Policies

In case of ULIPs, whose lock-in term has been revised to 5 years lately for providing the benefits of compounding to its customer, surrender value is a function of the performance of the underlying fund. So, in case the ULIP policy is surrender after the lock-in term of 5 years, policyholder is paid fund value while in the other case when policy is discontinued before the lock in term, discontinuance charge is deducted from the fund value, but the amount is payable only after the completion of 5 policy years. The policyholder earns a marginal interest @ approximately 3.5 to 4% on this amount.

How good is the idea of surrendering an endowment policy?

Amount payable as surrender value in case of an endowment policy is usually less than the total premium paid towards the policy, so even after one has taken finance on the LIC investment, he shall be better off in continuing the policy till maturity.

Or in the other case, surrendering the policy can only be beneficial to the policyholder, if the proceeds of the policy when invested in some other financial instrument shall yield a better return in comparison to what the policy would have yielded when continued until maturity.

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