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Surrender Value in Term Insurance

What you need to know about surrender value to make informed decisions about your term insurance policy.

surrender value in Term Insurance

Home / Life Insurance / Term Insurance / Decoding surrender value in Term Insurance

Decoding surrender value in Term Insurance
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One of the main criteria for an insurance policy is that it needs to be long-lasting. However, sometimes, policyholders give up the policy before the end of the policy term for various reasons. It could be encashed to meet an urgent financial need or surrendered as an outdated policy that doesn't meet their current financial needs. In this article, we'll talk about the surrender value of a term insurance plan, its types, how it's calculated, and which policies can be surrendered before they reach their full value.

What is surrender value?
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Surrender value in term insurance refers to the amount of money that an insurance company pays to the policyholder if they decide to terminate their policy before its maturity. It applies only to those term insurance policies with a surrender benefit.

When a policyholder opts for surrender, the insurance company calculates the surrender value based on the number of premiums paid, the duration of the policy, and other factors. The surrender value is usually a percentage of the total premiums paid minus any applicable charges or fees.

It is important to note that surrendering a term insurance policy means that the policyholder forfeits the death benefit, which is the policy's main purpose. Therefore, surrendering a term insurance policy should only be done after carefully considering one's financial situation and insurance needs.

IRDIA rules for surrender value in insurance
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The Insurance and Regulatory Development Authority of India (IRDAI) rules say that anyone with a term plan can give up their insurance policy. However, only after the policy has been in effect for three years will the policyholder get the payout of the surrender value. The IRDA decides what the policy's surrender value is for the first seven years.

From the third year on, the surrender value is up to 30% of the paid premium. Between the fourth and seventh years, the surrender value could fall to up to 50% of the paid premium. After seven years, the insurance company decides how much the premium should be. 

The general rule is that the closer you are to your date of maturity when you surrender,  the more money and benefits you get.

How is surrender value calculated in term insurance policies?
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Surrender value calculation in term insurance policies varies from one insurance company to another. Generally, the surrender value is calculated based on the following factors.

  1. Policy term: The longer the policy term in insurance, higher the surrender value.

  2. Premium paid: The higher the premium paid, the higher the surrender value.

  3. Policyholder’s age: The younger the policyholder at the time of surrendering the policy, the higher the surrender value.

In most cases, the surrender value is a percentage of the total premiums paid by the policyholder. The percentage varies depending on the policy term and the number of premiums paid. It is important to note that the surrender value is usually lower than the total premiums paid by the policyholder.

What are the types of surrender values ?
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Here are the types of surrender values in insurance.

Guaranteed Surrender Value (GSV)
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This is the minimum amount that an insurance company pays to the policyholder upon surrendering the policy. The GSV is predetermined at the time of policy purchase and is usually a percentage of the total premiums paid.

Special Surrender Value (SSV)
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This amount is offered at the discretion of the insurance company, over and above the GSV. The SSV takes into account various factors such as the policy duration, the number of premiums paid, the current market conditions, and other such factors. The SSV is usually higher than the GSV, but there is no guarantee that it will be paid.

Common reasons policyholders surrender their policy
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When you think about all the different ways you can use the cash value in your life insurance, you might wonder when it's best to turn in your policy for cash. Here are some situations in which this might make sense.

A better insurance policy
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Even though life insurance premiums usually increase with the age of the policyholder, there could be a chance that one might be able to get a policy with a better sum insured or a bonus. Surrendering one policy to get another better one in its place is one of the common reasons for people to surrender the policy.

Unable to afford premiums
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Sometimes, emergencies would require extra monthly expenditure, which would in turn make insurance premiums unaffordable. The only option left is to surrender your term insurance policy and probably opt for a cheaper one in its place.

Need a large amount of money for an unexpected event:
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 If a policyholder has a big expense to pay or a better investment opportunity but doesn't have any liquid cash to use, surrendering a life insurance policy may be an option.

Frequently Asked Questions
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Here are the answers to the questions related to the decoding surrender value in term insurance

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Who pays surrender value?

Surrender value is the corpus paid by the insurance provider to the policyholder when he/she surrenders the policy before the end of its policy term. It depends on the number of years the policyholder has paid the premium, the sum assured and the benefits provided by the insurance company.

How much money will I get if I surrender my policy after 2 years?

With most insurance providers, a policyholder will get no surrender value if he/she pays the premium only for two years since the surrender value is zero for up to three years of the life of the policy. Beyond three years, 30% of the premium is considered for guaranteed surrender value. 

Will I receive the full premium amount if I surrender my term insurance policy?

No, you will not receive the full premium amount if you surrender your term insurance policy. The surrender value is usually a percentage of the total premiums paid by the policyholder.

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet, and is subject to changes.