Exploring Surrender Value-Cashing Out or Keeping Coverage

While navigating the twists and turns of life, you never know when you might need some extra cash. A sudden hospitalisation, home repairs, accidents, or natural calamities could be for anything. That’s when you dig into your emergency fund and forage for money. However, your life insurance policy, too, could come in handy at times like these with its ‘surrender value’.

When buying life insurance, it is also crucial to understand what it is and how it works. Let's dive in!

What is Surrender Value in Insurance?

Simply put, surrender value is the cash an insurance company pays you if you cancel your life insurance policy before it matures. It’s essentially the accumulated value of your premiums minus any fees or charges. Think of it as getting back a portion of the money you've invested in your policy.

Different Types of Surrender Values in Insurance:

If you're thinking about surrendering your life insurance policy, it’s important to know that you’ll be entitled to one of two types of surrender values:

1. Guaranteed Surrender Value (GSV)

The Guaranteed Surrender Value is the minimum amount you can get back if you choose to surrender your policy early. Generally, this option kicks in after the policy has been active for at least three years.

• How it's calculated: The GSV is based on the total premiums you’ve paid, but keep in mind, it doesn’t include your first-year premium, any additional premiums for riders, or bonuses. To calculate it, you multiply the total premiums paid by a percentage called the Surrender Value Factor.
• Formula: GSV = (Total premiums paid) × (Surrender Value Factor).
• Surrender Value Factor: This is a percentage that increases as you hold the policy longer. So, the more years you’ve had the policy, the higher this value becomes. But remember, GSV doesn’t include any bonuses you might have earned.

2. Special Surrender Value (SSV)

The Special Surrender Value is usually higher than the GSV because it factors in bonuses and the paid-up value. This applies when you’ve stopped paying premiums, and your policy has become “paid-up” (meaning the sum assured is reduced, but the policy doesn’t lapse).

• Paid-up policy: If you can’t continue paying your premiums, your policy will still remain in force but with a lower sum assured, called the paid-up value. The SSV is calculated using this paid-up value, plus any bonuses and the surrender value factor.
• How it's calculated:
• Formula: SSV = (Paid-Up Value) + (Bonuses) + (Surrender Value Factor).
• Example: Let’s say you have a 20-year policy with a sum assured of ₹5,00,000, and you’ve been paying ₹25,000 in premiums annually. After five years, the policy has earned a bonus of ₹50,000, and the surrender value factor at that point is 35%. The Special Surrender Value will be calculated as: SSV = (35% × (5,00,000 × (5/20) + 50,000)) = ₹61,250.

A Few Things to Keep in Mind:

• The Surrender Value Factor starts at zero in the first three years and increases after that. It varies depending on how long your policy has been active and the type of policy you have.
• Different insurers may have different surrender value factors, and they may not always show up in the policy brochure, so it’s worth asking your insurer for details if you’re thinking about surrendering.

Why Policyholders Decide to Surrender Their Policies:

Life situations can change, and there are several reasons why you might consider surrendering your policy:

1. Emergencies in finances: Unexpected medical bills or job loss might necessitate accessing funds quickly.
2. Additional funds are needed: A down payment on a house or starting a business could require a lump sum of cash.
3. Change in life goals: Your life goals may have shifted, making the existing policy less relevant.
4. Policy no longer needed: You may have secured other forms of financial protection or your dependents are no longer financially dependent.
5. Transitions in career or lifestyle: Career changes or a simpler lifestyle might reduce your need for the current level of coverage.

Do All Life Insurance Policies Have a Surrender Value?

Not all life insurance policies offer a surrender value. Typically, pure term life insurance policies, which focus solely on providing a death benefit, don't have a cash value component and therefore, wouldn’t have a surrender value. However, other policies which have a savings or an investment component accumulate cash value over time and offer surrender value options.

Surrender vs. Keep: Which Option is Better?

Ultimately, the decision to surrender or keep your policy depends on your individual circumstances.

Keep the policy if you can afford the premiums and need long-term protection. It ensures your loved ones are financially secure in case of an unfortunate event.

Surrender the policy if you’re facing financial hardship, need a lump sum immediately, or have changed your financial situation significantly. However, remember that you’ll lose coverage, and the surrender value might not be as high as expected due to surrender charges.

Wrapping it Up

Before making a decision, consider consulting with a financial advisor to evaluate your options and make an informed choice. Understanding surrender value is crucial in making informed decisions about your life insurance policy. While it's tempting to cash out, carefully weigh the pros and cons before making a decision. Remember, life insurance is a long-term financial commitment designed to protect your loved ones.

Frequently Asked Questions (FAQs)

What is the benefit of surrender value?

The primary benefit of surrender value is that it provides you with a cash payout if you decide to terminate your policy early. This can be helpful in case of financial emergencies or if you no longer need the coverage.

Who pays the surrender value?

The insurance company pays the surrender value to the policyholder when they surrender the policy.

What is the process of surrender in a life insurance policy?

The process usually involves submitting a surrender form to the insurance company. You may need to provide identification and other relevant documents.

What is the surrender period?

The surrender period is the time frame after which you can surrender your policy and receive a surrender value. This period varies based on the insurance company and the type of policy.