Surrender Value in Life Insurance Policy - Meaning and Advantages

Life insurance plans are usually considered as financial obligations that take years to reach their maturity. But life can be full of surprises. And there may come days when your priorities change or when some sudden need for money emerges. In these circumstances, your insurance policy can become your alternative source of funds. Thus, we get to the question of interest: What is surrender value in life insurance?

Knowing what surrender value is essential for every person who has an insurance policy. It means "the cost of getting out of your insurance policy". Should you find that it is not worth having anymore and that you cannot pay for the insurance, the question "what is the surrender value of life insurance?" should give you an idea of how much money you have in your policy.

Surrender Value in Insurance: An Explanation

Put simply, surrender value in insurance is the amount of money which is refunded to the policyholder by the insurance company in case the individual discontinues his/her policy prior to its maturity date or prior to the death of the insured person. In other words, it is basically the amount that the policyholder accumulates within his/her insurance plan over a period of time, excluding the surrender charges. What must be remembered here is that not all insurance plans provide a surrender value. For example, a basic Term Insurance plan does not return anything to the plan holder upon cancellation; rather the plan will just lapse. The surrender value applies to "combined" insurance plans such as Endowment, Money-Back, and Whole Life Insurance policies.

Also Read: How Zyra Turns Complex Policy Fine Print Into Clear Insights

How Is That Done?

Should you opt to pay a premium for your cash value insurance policy, a portion of your premium is used by the insurer to cover for the risk factor and other administrative costs, while the other part is placed into an investment account, which earns interest. As time goes by, the amount grows into an investment, known as the surrender value of your policy.

However, it is not that simple since most insurers will insist that you meet certain minimum payment periods, spanning between two to three years. Within this period, your policy does not earn a surrender value.

What is Surrender Value of a Life Insurance Policy? Surrender value in insurance is calculated as:

Policy Surrender Value = (Premiums Paid X Surrender Value Factor) + Accumulated Bonuses - Surrender Charges

Also Read: Can Term Insurance Premium Increase Every Year?

Types of Policy Surrender Value

During your search for answers regarding the meaning of life insurance surrender value, you are likely to come across two types of policy surrender values, including;

a. Guaranteed Surrender Value Guaranteed Surrender Value is the minimum amount that the insurer guarantees to pay to you when the contract of the policy is ended beyond the minimum specified period. The surrender value is contained within the policy. Typically, the surrender value is calculated as the percentage of premiums paid, except the first year's premium and additional costs charged by riders.

b. Special Surrender Value

The special surrender value is greater than the guaranteed value. It depends on the performance of the investments done by the insurance company, together with bonuses credited to the policy. The basis for the special surrender value is called Paid-up value; this is the decreased sum assured considering the number of premiums paid in relation to the total premiums offered initially.

Advantages of Surrender Value

Even though it is discouraged because it will cause your insurance policy to lapse, there are advantages related to the life insurance surrender value in insurance:

• Financial Crisis: The primary advantage of the surrender value is that it acts as the ultimate measure for obtaining funds during crises or settling debt.
• Prevention of Financial Wastage: Should you experience excess costs, the policy can be surrendered to prevent wastage of your money on the premium payments.
• Efficient Investments: In some instances, the money in the policy will be more wisely invested elsewhere rather than staying in the same account.

Points to Keep in Mind While Surrendering Your Insurance

There are certain demerits that need to be considered before estimating what is surrender value in insurance​:

• Insurance Coverage Loss: The foremost advantage of owning a life insurance policy is the security it offers. Surrendering it would mean losing that safety net.
• Economic Impact: The surrender value is very small compared to the premium paid for the same in the beginning. Thus, you are likely to incur losses.
• Taxation: As per the state laws, the amount received due to the surrender value may attract taxes.

Also Read: How Zyra Reviews Your Insurance Policy in Minutes

Conclusion

By understanding what is surrender value in life insurance​, one is likely to be able to control his/her monetary possessions. Even though this notion can play an important role for any person, it must be used once in a blue moon. Life insurance is, indeed, meant to protect people's family members, and therefore one should not surrender it if there is a more favorable option for him/her.

It goes without saying that before taking such a crucial step as surrender value, one needs to receive an estimate of it from his/her insurance company. Moreover, one needs to compare all pros and cons with regard to surrendering the contract or just reducing the sum assured.

Also Read: Sum Insured vs Sum Assured: Which One Actually Protects You?

FAQs

Q1. Are the surrender value and the sum assured the same?

No. The sum assured is the entire amount payable to the beneficiaries when the insured passes away. The life insurance surrender value, on the other hand, is a much smaller amount payable to the policyholder for prematurely terminating the contract.

Q2. Am I able to receive the surrender value in a Term Plan?

Not normally. As Term Plans are purely for risk coverage, they lack any savings or investment element, and as such, they do not build a surrender value of their own.

Q3. What do I need to wait until I receive the surrender value of my plan?

In general, policies stipulate that you need at least 2 or 3 consecutive years of premium payments before you can claim your guaranteed surrender value.

Q4. Would surrendering my plan harm my credit rating?

No, terminating the life insurance policy through surrendering does not negatively impact your credit score. Nevertheless, it impacts your future financial stability.

Q5. Could I obtain a loan using my policy rather than surrendering it?

Yes, you can. Provided that your policy has built a surrender value, the vast majority of insurers allows you to borrow up to 80-90% of your surrender value.

Q6. Explain a “Surrender Charge” and for how long?

It refers to a charge that is imposed when withdrawing your cash value from the policy. The surrender charge is very high in the early years and gradually reduces to zero as the time nears its maturity.

Q7. What will happen to the accumulated bonus on surrendering?

You will get a percentage of them in most cases and this can be included in your surrender value. But it is rare for you to enjoy their full benefits since these will be paid out even years before their maturity period.

Q8. Is it possible for me to make a "partial surrender" of my policy?

Partial surrender is an option available for some types of insurance (e.g. ULIPs and Variable Life Insurance). It allows one to withdraw some value of the policy without terminating the entire coverage.