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What is Surrender Value in Insurance, and How is it Calculated?

Surrender value can allow policyholders to exit a policy early and recover some of the premiums paid. It is calculated by subtracting the surrender charges or penalties from the cash value of the policy.

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Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

Surrender value, also known as cash surrender value of life insurance, is an important concept in the insurance industry that refers to the amount of money an insurance policyholder is entitled to receive if they terminate their policy before the end of its term. It represents the cash value of the policy, which is the accumulated premiums paid by the policyholder plus any investment earnings minus any fees or charges.

What Do You Mean by Surrender Value in Insurance?

The cash surrender value of insurance is defined as the accumulated component of an insurance policy that is paid if you cancel your policy. In simple terms, surrender value is the amount that the insurer pays to the policyholder when the latter decides to terminate the policy before maturity. You need to remember that it is available on traditional insurance plans such as whole life or endowment plans. Surrender value is not applicable if you purchase a term plan.

How to Calculate the Surrender Value of Policy?

The cash value of a life policy accumulates over the years. Therefore, when you pay the premiums regularly for a longer period, the cash value of the policy increases. This is because the investible component of the premium has a longer time to grow.

The surrender value of a life insurance policy is calculated using a surrender value formula that takes into account several factors. These include the number of premiums paid, the duration of time for which the policy has been in force, the cash value of the policy, and any surrender charges or penalties that may apply.

To calculate the surrender value of a life insurance policy, you will need to follow these steps:

Step 1: Determine the cash value of the policy

The cash value of a life insurance policy represents the amount of money that has accumulated in the policy over time. It includes the premiums paid, as well as any investment gains or losses. You can find the cash value of your policy on the most recent policy statement.

Step 2: Determine the surrender charges or penalties

Most life insurance policies come with surrender charges or penalties that are designed to discourage policyholders from surrendering their policies before the end of the term. These charges can vary depending on the type of policy, the length of time the policy has been in force, and the number of premiums paid. You can find information about the surrender charges or penalties in the policy document.

Step 3: Calculate the surrender value

To calculate the surrender value of your policy, subtract the surrender charges or penalties from the cash value of the policy. The resulting amount is the surrender value that you will receive if you choose to surrender your policy.

It is important to note that the surrender value of a life insurance policy may be subject to income tax. If the surrender value is greater than the premiums paid, the difference may be considered taxable income. It is advisable to consult with a tax professional to determine the tax implications of surrendering a life insurance policy.

When Does a Life Insurance Policy Acquire a Surrender Value?

Life insurance policies are an important financial instrument that provides security and financial support to individuals and their families in times of need. A life insurance policy can offer financial assistance to a family in the event of the policyholder’s unexpected death.

  • After the policyholder has paid premiums consistently for three years, regular premium insurance earns surrender value. When a policyholder starts a life insurance policy, they pay a premium, which is the amount they pay to the insurance company for coverage.
  • The insurance company invests the premium, and over time, the investment earns interest. The amount earned as interest is added to the cash value of the policy, which increases over time. As a result, the longer a policyholder holds their life insurance policy, the more the cash value of their policy accumulates.
  • This value is calculated by the insurance company and is based on several factors, such as the policyholder’s age, the amount of premium paid, and the policy’s terms and conditions. The policyholder can request the surrender value if they wish to surrender their policy before the policy matures.

It is important to note that surrendering a life insurance policy before its maturity date can result in a lower payout than the sum assured. This is because the surrender value is typically lower than the total premium paid by the policyholder. Additionally, the policyholder may have to pay surrender charges, which are fees charged by the insurance company for surrendering the policy before maturity.

What is Surrender Value (Cash Surrender Value) in insurance and how it is calculated

What are the Types of Surrender Values?

Generally, there are two types of surrender values: guaranteed and non-guaranteed.

Guaranteed Surrender Value

Guaranteed surrender value refers to the amount of money that an insurance company promises to pay to a policyholder if they choose to surrender their policy before the end of its term. This value is usually mentioned in the policy document and is calculated based on the premiums paid, policy term, and other factors specified in the policy. It is a fixed amount and does not change throughout the policy term. The guaranteed surrender value is usually lower than the non-guaranteed surrender value.

Non-Guaranteed Surrender Value

Non-guaranteed surrender value, also known as the special surrender value, is the amount of money that an insurance company may pay to a policyholder if they choose to surrender their policy before the end of its term. This value is not fixed and depends on the company’s performance, market conditions, and other factors that affect the policy’s financial viability. The non-guaranteed surrender value is usually higher than the guaranteed surrender value, but there is no assurance that it will be paid.

The non-guaranteed surrender value is calculated based on the policy’s accumulated bonuses, which are declared by the insurance company based on its financial performance. These bonuses are usually of two types: reversionary bonus and terminal bonus.

a) Reversionary bonus

A reversionary bonus is a bonus declared by an insurance company every year during the policy term. It is a percentage of the sum assured and is added to the policy’s surrender value. The reversionary bonus is guaranteed once it is declared and cannot be taken back by the insurance company.

b) Terminal bonus

A terminal bonus is a bonus that is paid by an insurance company to a policyholder when the policy is surrendered or matures. It is a one-time payment and is calculated based on the policy’s performance and the company’s financial condition at the time of surrender or maturity.

Do All Policies Have a Surrender Value to Offer?

No, not all policies have a surrender value to offer. Being cautious and well-informed about the terms and conditions is crucial when contemplating the surrender of a life insurance policy. For instance, in the case of term insurance plans, there is no compensation or surrender value if you opt to terminate the policy before its term is completed. Conversely, with insurance plans such as Unit-Linked Insurance Plans (ULIPs) and Endowment Plans, a surrender value will be granted as long as you have paid your premiums for a minimum of three years.

Wrapping Up

The surrender value, also known as the cash surrender value of life insurance, is the amount of money an insurance policyholder can receive if they terminate their policy before its maturity date. This value is based on the number of premiums paid, the length of time the policy has been in force, and the policy’s accumulated cash value. Surrender value calculations can be complex, and they vary depending on the type of insurance policy, the age and health of the policyholder, and other factors.

It is important for policyholders to understand their policy’s surrender value and how it is calculated, as it can impact their financial decisions and future insurance needs. Ultimately, surrendering an insurance policy should be a well-informed decision made after careful consideration of the policy’s terms and the policyholder’s overall financial situation.

Key takeaways

  • The cash surrender value is defined as the accumulated component of an insurance policy that is paid if you cancel your policy.
  • The cash value of a life policy accumulates over the years. Therefore, when you pay the premiums regularly for a longer period, the cash value of the policy increases.
  • Most life insurance policies come with surrender charges or penalties that are designed to discourage policyholders from surrendering their policies before the end of the term.
  • A surrender value is an amount a policyholder receives when they surrender their life insurance policy before its maturity date.

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- A Consumer Education Initiative series by Kotak Life