Surrender of Insurance Policy means to cash of life insurance policy before benefits are dur to be paid. The Surrender Value of an Insurance Policy is the amount given to the insured at a time, when he is unable to pay premium related to Insurance Policy. At a particular time, when insured is not able to pay further premium and he has paid earlier premiums related to surrendered insurance policy. It is cash value of an Insurance Policy at a particular time. It is the portion of premiums paid or another amount recoverable on an insurance policy if the policy is cancelled immediately after having been issued.
Let's us discuss some more definitions;
It is the amount the policyholder will get from the life insurance company if he decides to exit the policy before maturity.
INVESTOPEDIA:
- The cash surrender value is the sum of money an insurance company pays to a policyholder or an annuity contract owner in the event that his or her policy is voluntarily terminated before its maturity or an insured event occurs.
- This cash value is the savings component of most permanent life'insurance policies, particularly whole life insurance policies.
- Depending on the type of policy, the cash value is available to the policyholder during his lifetime.
INSURANCEOPEDIA:
- Surrender value is the amount of money that a policyholder or annuity holder would get from the insurance company in case they voluntarily terminate the policy before its maturity date or the insured event occurs or.
- It is also known as cash surrender value or cash value.
From above definitions we shall draw a conclusion that Cash Value and Surrender Value of an Insurance Policy are the same. But there are many differences between Cash Value and Surrender Value related to an Insurance Policy.
CASH VALUE:
Cash value, or account value, is equal to the sum of money that builds inside of a'cash value-generating'annuity or permanent life insurance policy. It is the money held in your account. Your insurance or annuity provider allocates some of the money you pay through premiums toward investments—such as a bond portfolio—and then credits your policy based on the performance of those investments.
SURRENDER VALUE:
The surrender value is the actual sum of money a policyholder will receive if they try to access the cash value of a policy. Other names include the surrender cash value or, in the case of annuities, annuity surrender value. Often there will be a penalty assessed for early withdrawal of cash from a policy.
Conclusion we can draw from above definitions;
- Cash value, or account value, is equal to the sum of money that builds inside of a cash value-generating annuity or permanent life insurance policy.
- In most cases, the difference between your policy's cash value and surrender value are the charges associated with early termination.
- After a certain period, the surrender costs will no longer be in effect, and your cash value and surrender value will be the same.
Note: in case of early surrender of insurance policy, the insurer shall deduct some penalty or charges from Cash Value of Insurance Policy at the time of surrender of policy. It means Surrender Value is less than Cash Value in early termination of Insurance Polices but after a period of time as mentioned in the terms of issue of Insurance Policy, Surrender Value and Cash Value are equal.
LET'S SEE HOW WE CALCULATE SURRENDER VALUE OF A LIFE INSURANCE POLICY;
The Formula generally used for Calculation of Special Surrender Value is;
SSV= {BSA x (NP/TNP+BR} x SVF Or
Special Surrender Value= {Basic Sum Assured (Number of premium paid/Total Number of premiums payable) + Bonus received} Surrender Value Factor
The Surrender Value depends the number of years you have paid the premium and bonus received during tenure of policy.
There are two types of Surrender Value;
- Guaranteed Surrender Value;
- Special/ Cash Surrender Value.
GURANTEED SURRENDER VALUE: is often mentioned in policy documents and Special/Cash Surrender Value will be calculated at the time of receivable of request of surrender from the insured.
NOTE: 'an insured is eligible to receive Guaranteed Surrender Value if he has paid premium for a continuous period of three years. It is 30% of premium received less amount of first year premium paid.
Example: Let's us consider Mr. A has taken an insurance SA Rs. 5,00,000/- for a period of 20 years and premium payment Rs. 25,000/- for annually. He has paid three premiums at the time of requesting surrender of policy. In this case total premium paid by him is Rs. 75,000/-. Now in this case he will received (75000-25000) *30/100= Rs. 15000 only.
SPECIAL OR CASH SURRENDER VALUE:
Before special surrender value, we must understand paid-up value. If you stop paying premium after a specified period, your policy will continue but with lower sum assured. This reduced sum assured is called paid-up value or paid-up sum assured.
Paid-up value is calculated by multiplying the original sum assured and the ratio of the number of premiums paid to the number of premiums payable.
Example:
Mr. A paid the Rs 25,000 annual premium on a quarterly basis, and the sum assured is Rs 5 lakh for a policy term of 20 years. If Mr. A stop paying after three years, that is, have paid 12 premiums, the paid-up value will be Rs 5,00,000X (12/80).
In this case, 80 (20X4) is the number of premiums you were supposed to pay and 12 (3X4) is the number of premiums you have actually paid.
The paid-up value is Rs 75,000. This is the sum you will get at maturity or your nominee will get after you die. Paid-up value plus bonus is the total paid-up value. Mr. A has accumulated bonus of Rs. 60,000 as bonus.
Let's consider Special Cash Value:
Total Premium payment terms= 20*4=80
Total Premium paid=3*4= 12
Total Paid Up Value= Total Premium Paid + Bonus Accumulated=Rs. 75000+ Rs. 60000=Rs. 135000
Surrender Value factor= 27.76%
Special Cash/Surrender Value= {500000*12/80+60000)} Surrender Value Factor=135000*27.76%= Rs. 37,260/-
Insurance Regulatory Development Authority (IRDAI), the regulator has notified IRDAI (Acquisition of Surrender and Paid Up Values) Regulations, 2015 on 16th September, 2015 and shall be applicable to the products offered by the insurers which are approved by Authority.
Regulation 3 deals with Surrender Value and Paid Up Value under insurance policies offered by Life Insurers-
a. Every policy offered by life insurer under a linked platform -
(i) Shall provide surrender value in accordance with Insurance Regulatory and Development Authority (Linked Insurance Products) Regulations, 2013, as amended from time to time.
(ii) Shall comply with all the provisions related to surrender or discontinuance in accordance with the Insurance Regulatory and Development Authority (Linked Insurance Products) Regulations, 2013, as amended from time to time.
'b. Every policy offered by life insurer under a non-linked platform-
(i) Shall provide surrender value in accordance with the Insurance Regulatory and Development Authority (Non-Linked Insurance Products) Regulations, 2013, as amended from time to time.
(ii) Shall comply with all the provisions related to surrender in accordance with the Insurance Regulatory and Development Authority (Non-Linked Insurance Products) Regulations, 2013, as amended from time to time.
(iii) Which has acquired a surrender value shall not lapse by reason of non-payment of further premiums but shall be kept in force to the extent of paid up sum assured and the subsisting reversionary bonuses including guaranteed additions, if any.
(iv) The paid-up sum assured in 3 (b) (iii) shall be calculated by means of a formula as approved by the Authority, and contained in the terms and conditions of the policy.
v) For policies wherein the amount of premium payable is fixed and are of uniform amount, the paid-up sum assured (before inclusion of reversionary bonuses or the guaranteed additions, if any).
1. On death shall not be less than the ratio of the total period for which premiums have already been paid bears to the maximum period for which premiums were originally payable multiplied by the sum assured on death.
2. On maturity shall not be less than the ratio of the total period for which premiums have already been paid bears to the maximum period for which premiums were originally payable multiplied by the sum assured on maturity.
3. Adjustment shall be made to the paid-up sum assured calculated as above on account of survival benefits paid, if any.
(vi) For policies other than as mentioned in 3 (b) (v) above, the Authority may approve a different formula for calculation of paid up sum assured.
(vii) The Regulation 3 (b) (iii) above shall not apply,
a) Where the paid-up sum assured of the policy exclusive of attached bonuses and the guaranteed additions, if any, (under other than Micro Insurance and Health Insurance Business) is less than Rupees One Thousand Two Hundred and Fifty.
(b) Where the paid-up sum assured of the policy exclusive of attached bonuses and the guaranteed additions, if any (under Micro Insurance and Health Insurance Business) is less than Rupees One Hundred. (
c) Where paid up sum insured takes the form of an annuity of less than Rupees Two Hundred Fifty per month.
4. A life insurance policy may be terminated after expiry of revival period by paying the surrender value if the paid-up sum assured of the policy is less than as specified under 3 (b) (vii) above.
5. The Authority may issue instructions for payment of surrender value under extraordinary circumstances.
On July 8, 2019, Insurance Regulatory Development Authority (IRDAI) came up with some new rules on Unit Linked (ULIPs) and non-linked life insurance plans.
New Rule'-Other than single premium products: The minimum guaranteed surrender value shall be the sum of guaranteed surrender value and the surrender value of the any subsisting bonus and any guaranteed additions already attached to the policy.
The guaranteed surrender value shall be at least:
- 30% of the total premiums paid less any survival benefits already paid, if surrendered during the second year of the policy, and
- 35% of the total premiums paid less any survival benefits already paid, if surrendered during third year of the policy.
- 50% of the total premiums paid less any survival benefits already paid, if surrendered between the fourth year and seventh year of the policy
Meaning'- For the previous policies, the surrender value could be acquired only if a minimum of 2 premiums had been paid. Though there were few policies which could acquire surrender value in the 2nd'year itself.
Now, it is compulsory to give surrender value after the 1st'premium has been paid. In simple words, a customer can surrender the policy in the 2nd'year itself and minimum 30% of the premiums paid back will be returned to the customer. The customer would also receive the surrender value of the guaranteed bonus which was promised at the beginning of the policy.
There is not much difference in the surrender value after the 2nd year - Previously, the minimum amount was 30% of the premium for surrendering after 2 years whereas now it is 35%.
Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, author assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take appropriate advice of consultants. The user of the information agrees that the information is not professional advice and is subject to change without notice. Author assume no responsibility for the consequences of the use of such information.
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