Guaranteed Surrender Value in Life Insurance

Definition:

Guaranteed Surrender Value (GSV) in life insurance is the minimum payout the policyholder receives from the insurer on voluntary termination of the policy. That is, if the policyholder ever surrenders their policy prior to maturity, the insurance company guarantees to pay a minimum amount.

Contents

• How Guaranteed Surrender Value Works in Life Insurance.
• Why do Policyholders Choose to Surrender Policies?
• Pros and Cons of Surrendering
• Why It Matters for Policyholders
• Bottom Line
• FAQs

How Guaranteed Surrender Value Works in Life Insurance.

The Guaranteed Surrender Value is the minimum amount the policyholder is entitled to receive upon surrendering the policy.

• GSV is a legally assured amount calculated based on the premiums paid, usually excluding GST, rider charges, and the first-year premium. 

• GSV = (Total Premiums Paid - 1st Year Premium) × GSV Factor. It is available after a minimum lock-in period specified in the policy terms.

• This percentage increases the longer you stay with the policy. 

• The insurer is legally bound to pay the GSV once the eligibility criteria are met, as per IRDAI norms in India.

Real-life example:

Navneet buys a life insurance policy with a ₹1 crore sum assured. She plans to pay ₹ 1 lakh for 5 years. However, after paying for a total of 3 years, she decides to surrender her policy in the 4th policy year just before the 4th premium is due. Since she has completed 3 years of premium payment, she is eligible for the Guaranteed Surrender Value (GSV).

Why do Policyholders Choose to Surrender Policies?

Surrendering a life insurance policy is often a tough decision, but sometimes unavoidable. Policyholders may choose this route when their financial priorities shift or when the policy no longer aligns with their goals.

• Job loss or debt resulting in a financial crisis.

• Unsatisfactory policy returns.

• Changes or restructuring of financial goals.

Pros and Cons of Surrendering

When deciding whether to surrender your policy, it is important to consider the potential benefits and how that will impact you in the long term. Here is what policyholders typically find:

Why It Matters for Policyholders

Here are a few reasons why knowing GSV in advance matters for life insurance policyholders:

1. Offers liquidity in emergencies by allowing the policyholder partial access to emergency funds. 

2. It helps the policyholder make an informed decision when exiting the policy by allowing them to weigh the cash available upon exit vs. the loss in benefits upon exit.

3. Helps play a role in financial planning by evaluating investment outcomes vs. future commitments.

Bottom Line

In life insurance, Guaranteed Surrender Value is the minimum amount that the insured is entitled to receive from the insurer, even if the policy is terminated early. It is a legally assured amount calculated based on the premiums paid and usually available after a minimum lock-in period, depending on the policy terms. As a policyholder, you must review all the terms regarding surrender value to understand the benefits and drawbacks of surrendering a policy.

FAQs

Below are some of the frequently asked questions on Guaranteed Surrender Value in Life Insurance

What is the meaning of guaranteed surrender value?

The Guaranteed Surrender Value (GSV) is the minimum amount you’ll get from your insurer if you choose to end your life insurance policy early.

What is the difference between GSV and SSV in insurance?

The Guaranteed Surrender Value (GSV) is a fixed and guaranteed. On the other hand, the Special Surrender Value (SSV) often includes accrued bonuses. Thus, SSV provides a higher payout, especially if your policy has accrued benefits.

How do you calculate guaranteed surrender value?

The GSV is calculated using a simple formula: GSV = (Total Premiums Paid – First Year’s Premium) × GSV Factor.

If I surrender my policy early, will I lose money?

Yes, especially in the early years, the surrender value is often less than what you’ve paid in premiums.

Is surrendering a life insurance policy good or bad?

Surrendering a life insurance policy is a big decision and is not always advisable, especially if you are still supporting a family. However, if your financial needs have changed or if the policy no longer fits your goals, surrendering might be the right move.

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