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What Is Surrender Value (Cash Surrender Value) in Insurance and how is it calculated?

Buy Life Insurance Now What Is Surrender Value (Cash Surrender Value) in Insurance and how is it calculated?

Do you ever wonder about the cash value of your life insurance policy? If you want to cash out on your policy, you need to determine its surrender value.

Surrender Value Meaning:

The cash surrender value is defined as the accumulated component of an insurance policy that is paid if you cancel the same. You need to remember that the surrender value is available on traditional insurance plans such as whole life or endowment plans. Surrender value is not applicable if you purchase a term plan.

Types of Surrender Value?

Surrender value is the amount paid by the insurance company to the policyholder if the policy is terminated before the maturity. There are two kinds of surrender values:

  • Guaranteed surrender value: This is specifically mentioned in the insurance contract and is payable after completion of three years. Generally, this is 30% of the total premiums paid, excluding the first-year premium. This amount is also exclusive of any riders or bonus provided by the insurer.
  • Special surrender value: Special surrender value depends on the premiums paid, the policy period, bonuses and sum assured. Special surrender value is calculated by (Paid-up value + accrued bonuses) *surrender value factor. Here, the paid-up value is the basic sum assured * (number of premiums paid/number of premiums payable)

Special Considerations

In the case of whole life insurance policies, the insurer guarantees the cash value, which is payable only at the time of policy surrender. However, you can withdraw a part of the cash value or take a loan against it for current use. These loans are available at low-interest rates and usually tax-free unless the policy is surrendered. If the policy is surrendered, the outstanding loan sum is taxable in the ratio of cash value earnings. Also, you must repay the loan in time, or the death benefit will be reduced by the outstanding loan amount.

In case of universal life insurance plans, there is no cash value guarantee, but you can partially surrender it after the first year. These policies specify a surrender policy period, during which you can surrender your policy but with a charge of 10%. Post the surrender period there is no surrender charge. You also pay taxes on the part of the surrendered cash value that signifies cash value earnings.

Cashing out on your life insurance

When you surrender your life insurance plan, you are canceling the coverage and availing of the accumulated cash value. When you cash out on the insurance policy, the insurance company levies certain charges. These charges are reduced from the accumulated cash value on your policy.

Before deciding to surrender your insurance, you need to remember that the result will be the loss of life coverage. If you require money, you may consider borrowing against your life insurance policy.

What are the documents required for surrendering the life insurance policy?

  • A duly filled and signed surrender request form with policy details, name and contact details.
  • Original policy documents
  • Bank account details
  • A cancelled cheque of the account where the amount is to be deposited
  • Self-attested KYC documents

Cashing out versus borrowing against your life insurance policy

When contemplating the surrender value in insurance, you may refer to one of the two following ideas:

1. The investment value you will receive when you surrender your policy in lieu of the life coverage offered under the plan. When you choose this option, your nominees do not receive any policy benefits in case of an unfortunate event as you decide to cash out the accumulated value on the same before its maturity.

2. The amount you may be able to borrow against your insurance coverage during its duration.Under this option, you can avail of cash on your policy without foregoing the insurance coverage. Generally, the interest rate on such borrowed amount is low and affordable.Both the aforementioned options allow you to avail of cash on your insurance policy albeit in different ways.Both the aforementioned options allow you to avail of cash on your insurance policy albeit in different ways.

What do you lose on surrendering the life insurance policy?

When you surrender your life insurance policy before maturity, you become forgo the following benefits:

  • Loss of risk cover
  • Partial loss of investment because surrender value only considers premiums paid and bonuses that also only up to the extent of the surrender value factor.
  • No tax exemption on policy premiums.

How does ’cash value’ work in a life insurance policy?

To understand how to calculate cash surrender value of life insurance, you need to comprehend its working. You pay a premium to procure insurance coverage. A portion of this premium is used towards providing the life coverage and administrative fees and the balance is invested by the insurer on your behalf. This portion earns returns through such investments, which are then provided as accumulated benefits.

How is the cash value of a life insurance policy calculated?

The cash value in 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.

To know what is surrender value in insurance, it is recommended you ask your financial advisor or directly procure the calculation from the insurer. You also need to know the surrender period. It is the period that you need to wait before the policy has a cash surrender value.

Surrender fees:

Another aspect is the surrender fees charged by the insurer when you cancel the policy or withdraw funds prematurely. It is higher during the initial years and reduces as time passes.Before you decide to surrender the policy, it is recommended you ask the insurer if you can withdraw the cash surrender value and use some portion to buy a less expensive policy. You may choose to surrender your policy as you may not need it or want to purchase a new one. It is an important decision and you need to consider all factors before making your choice.


1. What is the meaning of the free-look period in insurance policies?

Free-look period is a time gap given to policyholders to cancel their insurance contract without paying any penalty for it. However, the policyholders must specify strong reasons for doing so.

2. What does ‘paid-up value’ in insurance mean?

When you stop paying premiums for your life insurance premiums after a specific period, the policy continues but with a lower sum assured than before. This condensed sum assured is referred to as the paid-up value.

3. What is the fund value in unit-linked investment plans (ULIPs)?

The fund value is the total monetary worth of your units in the ULIP plan. This can be calculated by multiplying the net asset value (NAV) of each unit on a specific day by the total number of units held.

4. Does term insurance have a surrender value?

Term plans are pure protection plans with zero surrender value. So, if you surrender, you do not get any money back.

5. Can you avoid paying surrender fees?

Yes. You can avoid the surrender fee by holding your life insurance contract until the surrender period. Post which, the insurer does not charge a fee even if you discontinue the policy. The surrender period is listed in the prospectus or the insurance contract.

- A Consumer Education Initiative series by Kotak Life


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