What is Surrender Value of Life Insurance: Types, Calculation & Impact on Investment (2024)

There may be some causes driving you to stop paying the premium of your life insurance policy in the middle of the term. Since you have paid previous premiums all along till that date, you may wonder whether you can claim any sum from your insurance company.

In such a scenario, you can get a surrender value from the insurer. So, let’s take a look at what surrender value is, along with some must-know factors related to it.

Surrender value is an amount that insurance companies give their customers if they terminate their policy before the maturity period. If they opt out of their plans in the middle of the term, they will get the total amount accumulated towards savings and the interest accrued on them.

Nevertheless, insurance companies give the sum only after deducting a surrender charge from the total fund value.

Now that you understand what the surrender value in a life insurance plan is, you will also need to know its types.

There are two major types of surrender value, as mentioned below:

Guaranteed Surrender Value

The surrender value amount in this type is predetermined. You can find this value in your policy brochure. You will be eligible to get this amount only if you keep paying your premium for three successive years. In this scenario, you will get 30% of the total value you have paid, excluding the 1st year’s premium.

Special Surrender Value

Policyholders get a special surrender value if they stop paying premiums, but they do not request to surrender their life insurance plans. In such circ*mstances, the life cover stays in effect, and resultantly, the sum assured amount keeps decreasing with time. In such a scenario, they get a paid-up value instead of the sum assured amount.

When individuals surrender these policies, their insurers calculate the surrender value after multiplying that paid-up value with the surrender value factor after adding bonuses if applicable.

Here, Paid-Up Value = Sum Assured x (Number of Paid Premiums / Number of Total Payable Premiums)

You can understand how the guaranteed and special surrender values work with the examples given below.

Surrender value factor is a ratio of the total premium policyholders have already paid and the total premium they will have to pay until its term ends. It is expressed in percentage value.

Let’s assume that the premium amount is ₹ 10,000/year, and you have continued policy payment annually for 5 years. Then, if its term is 20 years, the surrender value factor will be (5/20) x 100% = 25%.
Examples delineating how guaranteed and special surrender value is calculated have been mentioned below for better clarification.

How Guaranteed Surrender Value Is Calculated?

Let’s consider that a policyholder has purchased a policy having a term of 15 years, and its premium amount is ₹ 10,000. After 3 years of payment, he/she wants to get its surrender value. In this scenario, if the surrender charge is ₹ 1,000, the surrender value will be 30% of [{(3 x 10,000) – 10,000} – 1,000] = ₹ 5,700

How Special Surrender Value Is Calculated?

Let’s consider that a policyholder has purchased a policy having a term of 20 years, and the premium amount is ₹ 10,000/year. The sum assured amount is ₹ 5 Lakhs. The policyholder then wants to stop paying policy premiums after 5 years.

In this circ*mstance, the paid-up value = ₹ 5 Lakhs x (5/20) = ₹ 1,25,000

If he/she wants to get the special surrender value after 10 years, the surrender value factor will be = (10/20) x 100% = 50%.

So, after 10 years, he/she will get a special surrender value of ₹ 1,25,000 x 50% = ₹ 62,500.

Due to the mid-way termination, insurance companies deduct a surrender charge from that claimable sum. It varies from one insurance company to another. You can also know what the surrender charge is from the policy brochure you get while purchasing it.

Nevertheless, according to the mandate of IRDAI, insurance companies cannot apply this surrender charge if customers liquidate the fund values of their life insurance plans after 5 years of purchase.

The profit or maturity value of a life insurance policy grows in compound interest. This is why, when you keep your investment unharmed until the end of your policy term, you enjoy a maximum benefit due to the effect of compounding.

In the opposite scenario, when you raise a claim for the surrender value or withdraw it before time, it fails to accrue much interest. Your insurance company will return you the total savings or aggregated fund value. You will get whatever interest you gain from it. You also need to keep in mind the surrender charge that the insurance company will deduct. This is why the potential gains on your funds get reduced when you surrender your policy.

Now that you know what a surrender value is, you can infer that even though you had to terminate your life insurance policy mid-way, you will get back a certain amount. The insurance company will give you the amount it sets aside towards savings along with interest accrued on it. Nevertheless, this facility is available only on life insurance policies that give a maturity value.