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Terminating A Life Insurance Policy? Surrender Vs Paid Up – Which Is Better?

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If you think you bought a wrong insurance policy and want to discontinue the same. In such scenario, you can either surrender the policy or make it paid up. Now the question arises which option to choose – Which is a better choice?

There are N number of reasons because of which people do not want to continue paying premium for there running insurance policy and wish to terminate the same. But how to get the best out of it is something that needs to understand before taking such a decision. Discontinuing an insurance policy offers you two options – Surrender the policy or make it paid up. Lets have a look what does these terms means and which option is better for you?

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Surrender A Life Insurance Policy

Surrendering a life insurance policy means you are completely cancelling your policy. You do not have to pay any premium amount to the insurance company after surrendering your policy. Once your premium stops, you do not get any life insurance cover offered by the insurance company in return to your policy premium.

When you decide to surrender your insurance policy, you get ‘surrender value’ of the policy in return. Insurance companies calculates this amount based on the number of premiums paid, the total number of premiums etc.. But to get the ‘surrender value’ you need to make premium payments for atleast 3 years. If you cancel your policy before 3 years, you would not get any amount in return i.e you would forego all the premiums paid. Lets have a small example to understand this in a practical scenario :  Example :

Let’s say you had bought a policy with sum assured of Rs. 10 Lakhs. It had a tenure of 20 years, and you paid premiums for 5 years. The accrued bonus is Rs. 2,00,000.

In this case, if you surrender the policy, you would get:

Original sum assured * (Number of premiums paid / Total number of premiums that were required to be paid) + Accrued bonuses * Surrender value factor

That is, Rs. 10,00,000 * (5 / 20) + (Rs. 2,00,000 * 0.3)
= Rs. 2,50,000 + Rs. 60,000
= Rs. 3,10,000

Make A Life Insurance Policy “Paid-Up”

You can make your policy “paid up” rather than surrendering. You can check the term of the policy, if it allows you to make your policy “paid up”. When the premium for a life insurance policy is not paid on time and it lapses, then the Policy acquires a Paid Up Value and it is considered a Paid Up Policy.

Once you pay the premiums on a life insurance policy for 3 full years, the policy does not become wholly void even if no subsequent premiums are paid. Such policies are known as paid-up policies. In such cases, the sum originally assured is reduced to a sum bearing the same ratio to the full sum assured as the number of premiums actually paid to total number of premiums originally stipulated as payable under the policy.
If 6 out of the originally stipulated 30 premiums are paid, the sum assured under a paid-up policy would still be 20 percent of the original sum assured by the policy.

A paid-up policy loses all the additional benefits attached to the policy:

  • Double Accident benefits
  • Survival benefit installments in the case of money-back policies

Paid up value = Original sum assured * (Number of premiums paid / Total number of premiums that were required to be paid)

With this although the insurance cover continues, you would not be eligible for any future bonuses declared by the insurance company. However, you would retain any bonuses paid out before you made the policy “paid-up”. You do not get any amount when you convert a policy to “paid up”. Instead, you get an amount equal to the paid up value (plus any bonuses accrued before you made the policy “paid-up”) at the time of maturity, or in case of your early demise.

Lets have a small example to understand this in a practical scenario : Example :

Let’s say you had bought a policy with sum assured of Rs. 10 Lakhs,tenure of 20 years, and premiums paid for 5 years. The accrued bonus is Rs. 2,00,000.

If you make the policy paid up, the new sum assured would be:

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Rs. 10,00,000 * (5 / 20)
= Rs. 2,50,000

Thus, a cover of Rs. 2,50,000 would be available to you till the policy matures – that is, for another 15 years. At the end of 15 years, you would receive Rs. 2,50,000 + Rs. 2,00,000 =Rs. 4,50,000.

In case of your untimely death, your nominee would receive Rs.4,50,000.

Paid-Up Policies can further be surrendered if the policyholder wishes to take the money out. In that case, a certain surrender charge is deducted, depending on the tenure left for the policy to mature and the remaining amount can be paid out to the policyholder as Surrender Value. Even loans can be availed on Paid-Up Policies. If the loan amount is not paid back, then the Paid-Up Policy can be surrendered by the insurer to recover the loan amount.

One comment

  1. I TOOK A POLICY IN 2002 FOR A PERIOD OF 20 YEARS. AFTER THREE YEARS I STOPPED THE PAYMNET DUE TO SOME PERSONAL PROBLEMS. NOW IN 2012 I WISH TO SURRENDER MY POLICY. WHAT WILL BE AMOUNT RETURNABLE BY THE INSURANCE COMPANY.
    KINDLY INFORM ME

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