What is Surrender Value in Life Insurance and its Types & Benefits

When you choose a life insurance policy, naturally, you tend to focus on the premium amount, the sum assured, and the coverage. But there's one more aspect that you need to pay attention to: the surrender value.

Understanding the concept of surrender value would be useful if you decide to exit from your policy early.

This blog will walk you through what surrender value means, the types available, and answer common questions about surrendering your policy.

• What is the surrender value in Life Insurance
• Types of Surrender Value in Life Insurance

By understanding this concept, you can confidently choose a policy that aligns with your plans.

What Is Surrender Value in Life Insurance?

In a life insurance policy, you pay a premium every year in your lifetime and the policy pays the sum promised to the nominees after your death or on maturity of the policy. But there are instances where you can exit the policy before its maturity. If you have a surrender benefit in your policy, you will be paid for your early exit. 'Surrender value' means the financial compensation payable on surrender of the policy.

Here are some key things about surrender value that you must keep in mind.

• The surrender value is determined by the premiums paid, the duration of the policy, and the terms set by the insurer.
• You become eligible for surrender value only if you have paid premiums for a minimum specified period or the "lock-in period."
• Once you receive the surrender value, you lose the life cover of the policy.
• The amount of the surrender value is usually lower than the policy’s maturity benefits.

Types of Surrender Value in Life Insurance

You must know the different types of surrender values to evaluate whether surrendering your policy is a financially sound decision. Majorly, there are two types of surrender value: guaranteed surrender value and special (non-guaranteed) surrender value. Here’s a breakdown of each:

1. Guaranteed Surrender Value

The guaranteed surrender value is pre-determined by the insurance company. It is the minimum amount that the policy assures to pay if the policyholder surrenders the policy. Your policy documentation would figure out the guaranteed surrender value of your coverage. Usually, it is a percentage of the total premiums paid (excluding premiums for riders or additional benefits) after a specific period.

It becomes available only after the lock-in period, which can differ from one insurance company. Usually, it is two or three years, and the percentage increases with the number of years the policy is held.

2. Special or Non-Guaranteed Surrender Value

When you stop paying your policy premiums, your policy turns into a 'paid-up policy. This means that your sum assured gets reduced according to the premiums that you have paid to date. When you surrender a paid-up policy, the insurance company pays you the special surrender value. The special surrender value of a policy is not pre-determined like the guaranteed value. It is determined using the accumulated bonus of the policy, the prevailing market circumstances and the paid-up value of the policy. This is usually more than the guaranteed surrender value, but is not fixed or guaranteed in advance.

Do all Life Insurance Policies offer Surrender Value?

No, not all life insurance policies have a surrender value. This is a feature that is normally associated with Permanent Life Insurance policies such as Whole Life Policies, Endowment Policies and Unit Linked Insurance Policies.

1. Whole Life Insurance Policy

Whole life insurance policies develop cash value over time with premium payments. If you surrender the policy after the lock-in period is over, the insurance company will pay you a surrender value.

2. Endowment Life Insurance Policy

Endowment policies combine life insurance with investment opportunities. If you hold this policy for a specified period of generally 2-3 years, you become eligible for a surrender value in case you exit from the policy.

3. Unit Linked Insurance Policy (ULIP)

A ULIP policy also provides investment and life insurance benefits. These insurance come with a lock in duration of 5 years as per the IRDAI rules. If you surrender this policy after the lock-in period, you get a surrender value. However, surrendering your policy attracts heavy discontinuation charges.

Note that life insurance policies like term insurance and short-term policies do not provide surrender benefits.

Should You Surrender Your Life Insurance Policy?

Before surrendering a life insurance policy, it is important to evaluate whether doing so supports your present financial situation and long-term goals. If you give up now, you will lose money, and also be cancelling your life insurance protection, possibly reducing the amount of money you will eventually collect on the policy.

When Is it Okay to Surrender Your Policy?

Considering the loss of life cover and reduced sum assured, is it a good idea to surrender your policy? Given below are the some situations where you can consider surrendering your life insurance policy.

• Inability to Afford Premiums: If you are the one who is struggling to keep up with your premium payments due to financial constraints, surrendering the policy is the best option.
• The Policy no Longer Fits Your Needs: Some factors like changes in family size, financial goals, or liabilities can make you think that the policy does not suit your needs anymore. You can surrender the policy to get a different one .
• Investment Opportunities: If the main purpose of getting life insurance is an investment, you can surrender the policy if you have better investment opportunities. However, you must keep in mind that you lose the life coverage after you surrender the policy.

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How to Decide Whether Surrendering Your Policy Is the Right Financial Move

Listed below are the things to consider before you make the decision to surrender your life insurance policy:

• Ask Yourself Important Questions: Think about why you desire to surrender the policy. Assess if your hardship is permanent or temporary and if your insurance needs have changed.
• Compare Surrendering With Continuing the Policy: Proceed to compare surrender value with predicted maturity benefit and life cover. And sometimes policy is more important in the long term.
• Assess Your Current Financial Needs: Consider if you want the cash now at the expense of future insurance cover. If you only need the money for a certain amount of time, then other financing options might be appropriate for you.
• Consider Your Long-Term Financial Goals: Imagine the effect that losing the insurance might have on your long-term financial goals, whether supporting your family, investing for retirement, or building your wealth.
• Consult a Professional: Before taking the final decision, one should consult an expert insurance agent. You’ll get expert advice on how the terms of your policy affect your finances.

What Are the Alternatives to Surrendering a Life Insurance Policy?

Sometimes surrender is not the only option. Depending on your policy you may wish to consider the following: 

• Policy Loan: Some traditional life insurance policies will give the policy owner a loan on the value of the policy instead of surrendering the policy. This helps to meet the short term financial needs and keep the policy active.
• Check Premium Payment Flexibility: Some insurers will allow you to change the way you pay your premiums, or provide temporary relief if you are in financial trouble. Call your insurance company and ask what options are available to you through your policy.
• Revive a Lapsed Policy: If the insurance lapses owing to non-payment of premium, the policy can be revived within the allowed time period by fulfilling the requirements of the insurer.
• Review Available Options with Your Insurer: Consult your insurer before you surrender the policy, and see what your options are and which one fits your financial situation best.

Common Financial Mistakes to Avoid Before Surrendering Life Insurance

Avoiding these frequent mistakes can help you make better financial decisions.

• Surrendering Due to Temporary Cash Needs: Short term financial issues do not necessarily mean that you have to surrender on a financial product in the long term.
• Ignoring Future Protection Requirements: Life insurance gives protection for dependents. Consider future chores before you lose this protection.
• Not Understanding the Tax Implications: The tax implications of surrendering various life insurance policies may depend on the type of policy and the rules that apply. Better to know upfront what the implications will be.
• Overlooking Other Available Options: Surrender may not be the best option. Paid-up status, policy loans, premium flexibility or policy revival may be more suitable.
• Not Reviewing Policy Terms: Make sure you see your policy papers to check for surrender conditions, lock in periods and the deductions that apply before you decide.

How Surrendering a Policy Can Affect Your Future Financial Planning

Surrendering a policy might have a number of impacts on your long-term financial plan.

• Loss of Long-term Financial Safety Net: If you cash in a life insurance policy you gain access to cash now but you also lose your life insurance coverage. If something unexpected happens, your family could be in financial jeopardy.
• Need for Replacement Insurance: If you still need insurance protection, you might have to pay higher rates later when you cash in your insurance surrender value and get a new policy, due to your age or health.
• Impact on Family Financial Goals: Life insurance is typically used to meet such objectives as providing for children’s education, repaying loans or protecting family income. These objectives may be impacted by surrender.
• Reassess Insurance Requirements: Check your current liabilities, dependants and financial commitments before choosing if renouncing is an option.
• Plan Future Insurance Coverage: If you have to surrender make sure you have the right insurance to secure your financial position.

Key Life Insurance Concepts to Understand Before Making Exit Decisions

Understanding related life insurance concepts can help you make an informed decision.

Surrender Value vs Maturity Benefits

Surrender value is the amount received when an eligible policy is terminated before maturity, whereas the maturity amount in life insurance is the benefit payable when the policy completes its full term.

Role of Nominees and Appointees

It is vital to know the role of an appointee in life insurance and nominee while the policy is active, especially when preparing long-term financial protection.

Claim Process if the Policy Continues

If you do not want to surrender the policy, knowing the life insurance claim process and required documents can help the nominees fulfil future claim requirements without undue delay.

Review Your Original Financial Objective

Before you quit, consider the surrender value of life insurance, and the reason why you bought the policy. If the original financial motive to buy is still there, it can be worth keeping the insurance long term.

Understand Surrender Values to Make a Wise Choice!

Surrendering a life insurance policy is a major financial and life decision. When you surrender your policy, you get a lower payout, and you lose your life insurance benefits. To make a wise decision, you must understand what surrender value is, along with the consequences of surrendering your policy. For more details do consult with a life insurance posp for more mindful decision-making.