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What is surrender value in insurance? (Types, Benefits & Examples)

Have you ever wondered about the concept of surrender value while purchasing an insurance policy? You are not alone, policyholders often want to understand the concept of surrender value, and we are here to elucidate the same.
This article will talk about the following important aspects about the concept of surrender value in life insurance:

  • What is surrender value?
  • Types of surrender value
  • Benefits of having a policy with a surrender value?
  • Examples of a policy having a surrender value

What is surrender value?

There are situations where the policyholder may want to terminate their insurance policy before maturity. Upon policy surrender, the insurance company is liable to pay whatever is the current surrender value (minus company charges and penalties) to the policyholder. This is payment is called as the surrender value of a policy. A surrender value is usually available when a policyholder purchases an endowment plan. That being said, a surrender value is also available in certain other types of insurance policies.

Surrender value factor

The surrender value is dependent on your surrender value factor. For instance, if your insurance policy has a has a surrender value of 30%, you will receive only 30% of the total premium paid as a surrender value. Different types of policies have different surrender value factors.

Your surrender value factor will be mentioned on your policy brochure and policy bond.

Types of surrender value

Guaranteed surrender value

A guaranteed surrender value is paid based on the surrender value factor. For instance, if a person has surrendered a policy after 5 years and has a surrender value factor of 30%, he will receive 30% of the total premium paid as a surrender value. Other additional company charges may also apply.

Special surrender value

A special surrender value is an amount that is equal to or higher compared to the guaranteed surrender value. This special surrender value is calculated based on the paid-up policy value and the total accrued bonus (multiplied by the guaranteed surrender value factor).

Benefits of having a policy with a surrender value?

Peace of mind: Having a policy with a surrender value ensures that the policyholder will get a particular lump sum payment even if he decides to terminate the policy before maturity. If you wish to avail of this benefit, ensure that your policy has a surrender value component linked with it.

Flexibility: A policyholder can prematurely terminate his policy knowing he will get a surrender value. This provides flexibility to the policyholder. He can then decide to enroll with another insurance company.

Payment of expenses: The policyholder can use the surrender value to pay for his expenses like living expenses, marriage expenses, medical expenses, educational expenses, etc. Policies should not ideally be surrendered before maturity but in certain rare cases the policyholder may be forced to surrender his policy due to certain unfortunate conditions.

Examples of a policy having a surrender value

Let us understand the concept of surrender value with 2 simple examples.

Example 1

Let us assume that Mr. Rishikesh has bought a ULIP life insurance plan from HDFC Life Insurance, having policy maturity of 20 years. He has paid his premium on time for over 10 years.
The total amount of premium paid by Mr. Rishikesh amounts to Rs 5 Lakhs. The company invested this premium into a mutual fund and the current value of Mr. Rishikesh’s fund is Rs 8 Lakhs.
Upon policy surrender, Mr. Rishikesh will receive Rs 8 Lakhs (minus company charges). This amount can be termed as Mr. Rishikesh’s policy surrender value. Post surrender, the policy will be terminated.

Example 2

Let us assume that Mrs. Shakuntala bought a LIC endowment insurance policy, having maturity of 20 years. Mrs. Shakuntala regularly paid her premium for 5 years and the total premium paid amounted to Rs 2 Lakhs. As her endowment policy has a surrender clause within it, she can surrender her policy and receive the Rs 2 Lakhs as her surrender value. Rest assured, the company will deduct their charges and penalties from this amount and then release the value to her.

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