When you choose a life insurance policy, naturally you tend to focus on the premium amount, the sum assured, and the coverage. But there's one more aspect that you need to pay attention to the surrender value. 

Understanding the concept of surrender value would be useful if you decide to exit from your policy early.

In this blog, we’ll walk you through what surrender value means, the types available, and answer common questions about surrendering your policy.

  • What is surrender value in Life Insurance
  • Types of Surrender Value in Life Insurance

By understanding this concept, you can confidently choose a policy that aligns with your plans.

What is Surrender Value in Life Insurance?

Under a life insurance policy, you pay yearly premiums during your life, and the policy pays the sum assured to the nominees after you pass away or when the policy matures. However, you can exit the policy before its maturity in certain situations. If your policy includes a surrender benefit, you will receive compensation despite your early exit. The amount of the cash compensation payable on surrender of the policy is known as 'surrender value'.

Here are some key things about surrender value that you must keep in mind.

  • The surrender value is determined by the premiums paid, the duration of the policy, and the terms set by the insurer.
  • You become eligible for surrender value only if you have paid premiums for a minimum specified period or the "lock-in period."
  • Once you receive the surrender value, you lose the life cover of the policy.
  • The amount of the surrender value is usually lower than the policy’s maturity benefits.

Also Read: What is Maturity Amount in Life Insurance?

Types of Surrender Value in Life Insurance

You must know the different types of surrender values to evaluate whether surrendering your policy is a financially sound decision. Majorly there are two types of surrender value- guaranteed surrender value and special (non-guaranteed) surrender value. Here’s a breakdown of each:

1. Guaranteed Surrender Value

The guaranteed surrender value is pre-determined by the insurance company. It is the minimum amount that the policy assures to pay if the policyholder surrenders the policy. The guaranteed surrender value of your policy would be mentioned in your policy documents. Usually, it is a percentage of the total premiums paid (excluding premiums for riders or additional benefits) after a specific period.

It becomes available only after the lock-in period, which can differ from each insurance company. Usually, it is two or three years, and the percentage increases with the number of years the policy is held.

2. Special or Non-Guaranteed Surrender Value

When you stop paying your policy premiums, your policy turns into a 'paid-up- policy. This means that your sum assured gets reduced according to the premiums that you have paid to date. When you surrender a paid-up policy, the insurance company pays you the special surrender value. The special surrender value of a policy is not pre-determined like the guaranteed value. It is calculated based on the policy's accumulated bonus, current market conditions, and the policy's paid-up value. It is generally higher than the guaranteed surrender value but is not fixed or promised in advance.

Also Read: Who is an Appointee in Life Insurance?

Do all Life Insurance Policies offer Surrender Value?

No, all life insurance policies do not pay a surrender value. Usually, permanent life insurance policies like whole life policies, endowment policies, and Unit Linked Insurance Policies include this feature.

1. Whole Life Insurance Policy

Under Whole life insurance policies, a cash value gets accumulated over time through premium payments. If you surrender the policy after the pre-determined lock-in period, the insurance company pays you a surrender value.

2. Endowment Life Insurance Policy

Endowment policies combine life insurance with investment opportunities. If you hold this policy for a specified period of generally 2-3 years, you become eligible for a surrender value in case you exit from the policy.

3. Unit Linked Insurance Policy (ULIP)

A ULIP policy also provides investment and life insurance benefits. These policies have a lock-in period of 5 years as per the rules set by the IRDAI. If you surrender this policy after the lock-in period, you get a surrender value. However, surrendering your policy attracts heavy discontinuation charges.

Note that life insurance policies like term insurance and short-term policies do not provide surrender benefits.

When is it okay to surrender your policy?

Considering the loss of life cover and reduced sum assured, is it a good idea to surrender your policy? Here are some situations where you can consider surrendering your life insurance policy.

  • Inability to afford premiums: If you are struggling to keep up with premium payments due to financial constraints, surrendering the policy can be a good option.
  • The policy no longer fits your needs: Factors like changes in family size, financial goals, or liabilities can make you think that the policy does not suit your needs anymore. You can surrender the policy to get a different one.
  • Investment opportunities: If the main purpose of getting life insurance is an investment, you can surrender the policy if you have better investment opportunities. However, you must keep in mind that you lose the life coverage after you surrender the policy.

Understand Surrender Values to Make a Wise Choice!

Surrendering a life insurance policy is a major financial and life decision. When you surrender your policy, you get a lower payout and you lose your life insurance benefits. To make a wise decision, you must understand what surrender value is along with the consequences of surrendering your policy.

FAQs on surrender value in life insurance

What is the difference between surrender value and cash value?

The surrender value is the amount a policyholder receives if they terminate their policy before its maturity. Cash value is the savings or investment portion of your life insurance policy that builds up over time. It represents the gross amount before any deductions for surrendering the policy.

How is the surrender value calculated?

Guaranteed Surrender Value is a percentage of the total premiums paid (excluding rider premiums and taxes) after the lock-in period, as specified in the policy document. Special (Non-Guaranteed) Surrender Value includes the policy’s paid-up value, accrued bonuses, and additional benefits.

How do you avoid surrender charges?

To avoid surrender charges, wait until the lock-in period is over before surrendering your policy. Instead of surrendering, you can convert it to a paid-up policy. You stop paying premiums and keep the policy active with reduced benefits.

How to know policy surrender value?

The guaranteed surrender value is mentioned in the insurance policy documents. Look for the section on surrender value, which outlines the calculation formula, charges, and eligibility. You can also reach out to your insurance provider or agent for an accurate, up-to-date surrender value calculation.