Surrender Value in Insurance

6 min read Posted on 22 July 2024

Your financial needs may change anytime. The policy you bought a few years ago may not meet your current or future goals. Or maybe, you are striving through a financial crisis and decide to encash your life insurance policy to sustain. Different circumstances may lead you to surrender your policy harshly and invest elsewhere.

Surrender Value in Insurance: Meaning and Calculation

But is it the right thing to do? Is there any benefit applicable if you surrender your policy in mid of the policy term? What is surrender value meaning? Let us dig deep and discover about surrendering your life insurance policy.

What is a Surrender Value in Insurance?

Life insurance is a long-term commitment. Surrendering life insurance means you no longer need the insurance company's services and want to terminate the contract. Upon surrendering your life insurance policy before maturity, you will be paid out the surrender value of the policy.

Surrender value in life insurance, refers to the amount the life insurance company pays you back when you decide to terminate your policy before the maturity date. Upon surrender, the company calculates the surrender value based on the type of the policy, the number of premiums paid, policy duration, and other factors. Surrender value is paid only after the policy has been active for a specified period, say 3 to 5 years (per the policy terms).

Surrender charges are applicable at the time of policy surrender. As per the IRDAI mandate, the life insurance company cannot levy any charges if the policy is surrendered after completing five policy years.

How to Calculate Your Life Insurance Surrender Value?

The ideal way to calculate the surrender value of life insurance is by using the surrender value calculator. You can use the surrender value calculator on an insurance company's website. Using surrender value is reliable and provides an estimate of what amount you will receive in your hands after the applicable deductions (if any). You must provide basic information like policy type details, premium amount, policy tenure, and personal details. Upon submission, your policy's surrender value will be reflected.

Surrender Value Calculation Key Metrics

Cash Value Accumulation: Premium paid, including interest or investment gains

Surrender Charges: Applicable feed deducted from cash value

Policy Loans and Outstanding Debts: Subtracted from the cash value (if any)

Adjustments for Unpaid Premiums: Deducted from the surrender value

Policy Terms and Conditions: Varies from insurer to insurer mentioned in the contract

What are the Types of Surrender Value?

Here are the two types of surrender value in insurance:

Guaranteed Surrender Value (GSV)

The guaranteed surrender value is the minimum amount a life insurer pays to the policyholder upon surrendering the policy. It is predetermined that is mentioned in the policy brochure and is payable after completing 3 policy years. Usually, it is the sum of the total premium paid, excluding the first policy year premiums. Remember, the GSV does not include any bonuses or premiums paid to the rider.

Special Surrender Value (SSV)

Special surrender value is paid over and above the GSV and depends upon multiple factors, such as total sum assured, total premium paid, policy term, and applicable bonuses. However, to understand the special surrender value of a life insurance policy, you need to know the paid-up value.

Suppose a policyholder doesn't pay the premium after a certain period. In this case, the policy converts to a paid-up policy, and the sum assured reduces to the total premium paid. Upon surrendering a paid-up policy, a special surrender value is paid to the policyholder by estimating the paid-up value and surrender value factor.

Do You Need to Surrender Your Life Insurance Policy?

You might decide to stop paying your life insurance premiums if you have unpaid debts or dependents who require financial support or find a better investment alternative. However, the need for life insurance could return in the future. Consequently, term insurance is crucial if you want to ensure the long-term financial security of your loved ones.

Surrendering life insurance is a decision that depends on your personal circumstances. But before you surrender the policy, think twice whether you will gain from it or not. There are certain key points that you need to consider before surrendering a life insurance policy.

Things to Ensure Before You Surrender Your Policy

Here is the checklist of do's and don'ts before surrendering your life insurance policy:

Do's	Don'ts
1. Review Policy Terms Take time to understand the terms, conditions, and implications of surrendering the policy	1. Rush Into Decision Don't make hasty decisions without fully understanding the consequences
2. Contact Your Insurance Provider Reach out to your insurance provider to discuss your intention to surrender your policy and inquire about the surrender process	2. Ignore Communication Don't neglect to inform your insurer about your decision to surrender your policy or fail to respond to their queries
3. Assess Surrender Value Understand the surrender value of your policy, which may differ based on the policy's duration and premiums paid	3. Forget About Alternatives Don't overlook exploring other options such as policy loans, partial withdrawals, or converting the policy to a paid-up policy
4. Complete Required Forms Fill out any necessary surrender forms accurately and submit them to your insurer within the specified timeframe	4. Miss Payment Deadlines Don't forget to pay any outstanding premiums or loans, as this may affect your surrender value or policy status
5. Seek Professional Advice Consider consulting a financial advisor or tax expert to understand the financial implications of surrendering your policy	5. Disregard Tax Implications Don't overlook potential tax consequences associated with policy surrender, which may vary based on your individual circumstances

Do's

Don'ts

1. Review Policy Terms

Take time to understand the terms, conditions, and implications of surrendering the policy

1. Rush Into Decision

Don't make hasty decisions without fully understanding the consequences

2. Contact Your Insurance Provider

Reach out to your insurance provider to discuss your intention to surrender your policy and inquire about the surrender process

2. Ignore Communication

Don't neglect to inform your insurer about your decision to surrender your policy or fail to respond to their queries

3. Assess Surrender Value

Understand the surrender value of your policy, which may differ based on the policy's duration and premiums paid

3. Forget About Alternatives

Don't overlook exploring other options such as policy loans, partial withdrawals, or converting the policy to a paid-up policy

4. Complete Required Forms

Fill out any necessary surrender forms accurately and submit them to your insurer within the specified timeframe

4. Miss Payment Deadlines

Don't forget to pay any outstanding premiums or loans, as this may affect your surrender value or policy status

5. Seek Professional Advice

Consider consulting a financial advisor or tax expert to understand the financial implications of surrendering your policy

5. Disregard Tax Implications

Don't overlook potential tax consequences associated with policy surrender, which may vary based on your individual circumstances

If you decide to surrender life insurance, ensure that your other life insurance and investment returns will cover the living costs for your family members.

How to Surrender Your Policy?

Remember, not all insurance policies offer surrender value, so you need to go through the terms and conditions of the policy. While endowment or ULIP plans may offer surrender value, term plans may terminate on surrender with no surrender value. Surrendering your life insurance policy differs slightly depending on the life insurance provider. However, you can follow the typical steps to cancel your life insurance policy:

Fill out the surrender form and inform the company about your desire to cancel your insurance coverage.
Send the form by mail to your insurance company, and keep a copy of it in the same place as the mail receipt. These records provide evidence that you filled out and mailed the form.
Once the insurance company receives the request, they will process your policy surrender request.

Documents Required to Surrender Term Insurance Policy

The following documents are required to surrender the term insurance policy:

Surrender form
ID proof
Original policy document
Bank account details
Any additional forms or declarations

Final Words

By now, you are well aware of surrender value meaning, types of surrender value, and how you can surrender your policy. Once you surrender life insurance, you and your nominee will no longer be covered with the policy benefits.

Consider what other life insurance options you need to have in place before surrendering any policy, as well as any fees or other consequences, before starting the process.

* Disclaimer: Any information provided here regarding insurance products, companies, and other schemes is for general informational purposes only and is subject to change according to the insurer's terms without prior notice.