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

What Is Surrender Value (Cash Surrender Value) in Insurance and how is it calculated?
  • 10th Oct 2019 |
  • 35,031

Do you ever wonder about the cash value of your life insurance policy?

Because if you want to cash out on your policy, you need to determine its surrender value.

If you are hearing the term surrender value for the first time, keep reading because we will cover everything from what do you mean by surrender value, what are its types, how to calculate surrender value of term life insurance, to what is paid up value, how to close policy before maturity, how you can cash out your policy, and more.

What do you mean by surrender value?

The cash surrender value is defined as the accumulated component of an insurance policy that is paid if you cancel your policy. 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. 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.

What are the types of surrender value?

There are two kinds of surrender values:

  • Guaranteed surrender value
  • This is specifically mentioned in the insurance contract and is payable after the completion of three years. Generally, the amount accounts for 30% of the total premiums paid, excluding the premium amount you pay in the first year. This amount is also exclusive of any riders or bonuses provided by the insurance company.

  • Special surrender value
  • This type of surrender value depends on the premiums paid, the policy period, bonuses and sum assured. Special surrender value can be calculated using a simple formula which is:
    (Paid-up value + accrued bonuses) X surrender value factor An obvious question that arises here is, what is paid up value? It is nothing but the basic sum assured X (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 are usually tax-free unless the policy is surrendered.

On surrendering the policy, 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 the 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.

How can you cash out on your life insurance policy?

When you surrender your life insurance plan, you are cancelling the coverage and availing the accumulated cash value. When you cash out on the insurance policy, the insurance company levies certain charges, and 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 loss of life coverage. Therefore, if you require money, you should consider borrowing against your life insurance policy instead of cashing out the policy itself.

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

Though surrendering a life insurance policy is not a cumbersome task, it entails important documentation and paperwork. Following are the list of documents required while surrendering your 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.

What is the difference between cashing out and 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 before its maturity.

2. The amount you may be able to borrow against your insurance coverage while it’s active.

Under this option, you can avail cash on your policy without foregoing the insurance coverage. Generally, the interest rate on such borrowed amounts is low and affordable.

What do you lose on surrendering the life insurance policy?

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

  • Loss of risk cover.
  • Partial loss of investment because surrender value only considers premiums paid and bonuses.
  • No tax exemption on policy premiums.

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

To understand what is the cash surrender value of term life insurance, you need to comprehend how it works. You pay a premium to procure insurance coverage, and a portion of this premium is used towards providing life coverage and administrative fees. The balance is invested by the insurer on your behalf. This balance amount that is invested in different investment schemes earns a considerable amount of returns, which are then provided as accumulated benefits.

How to calculate the surrender value of policy?

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 the cash surrender value of term life insurance, it is recommended you ask your financial advisor or directly procure the calculation from the insurer. You also need to know what a surrender period means. It is nothing but the period that you need to wait before the policy has a cash surrender value.

What is the surrender fees?

Another aspect of surrendering your life insurance plan is the surrender fees charged by the insurer when you cancel the policy or withdraw funds prematurely. The value of surrender fees is higher during the initial years, and it keeps reducing as time passes.

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. Since the surrender fees can be a significant value for you, it is recommended that you ask the insurer if you can withdraw the cash surrender value and use some portion of it to buy a less expensive policy before you decide to surrender your current life insurance policy.

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


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

The 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. Depending on the insurer, a free look period might run up to 10 days. The policyholder can decide whether or not to keep the insurance policy throughout the free look term; if they are not satisfied and desire to cancel within the free-look period, they will receive a full refund. This duration, however, may differ from one insurer to the next.

2. What is paid up value in insurance?

When you stop paying premiums for your life insurance policy 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. The surrender value increases as the number of premiums paid increases. The surrender value component is a proportion of the whole amount paid up plus the bonus.

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 your policy, you choose not to get any money back.

5. Can you avoid paying surrender fees?

Yes. You can avoid the surrender fee payment by holding your life insurance contract until the surrender period. This is so because post that period, your insurance provider does not charge any fees post that period even if you discontinue the policy. The surrender period is listed in the prospectus or the insurance contract, which you must go through while buying your policy.

Kotak e-Term Plan


  • Nominal Cost
  • Multiple Plan Options
  • Flexible Payout Options
  • Critical Illness Rider
  • Tax Savings
  • Long term Coverage

Ref. No. KLI/22-23/E-BB/492


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