The legitimacy of insurance is based on the fact that a contract binds a policy purchased. It is this contract that dictates the rules and regulations of an insurance policy. It governs the holder and the company itself. In a situation where the policy is voluntarily terminated before its maturity, the surrender value is what is paid to the policyholder by the insurance company.
What is surrender value in insurance?
In simpler terms, if you stop paying premium while your insurance policy has not ended, you are entitled to an amount. We call this amount surrender value, and it varies depending on the number of years your policy has been on. They also take factors like the premium amount and bonus received into consideration.
Taking the name literally, surrender value is the sum you get when opting out of your insurance contract. For example, if you purchased the wrong policy, and want to opt-out, you would receive a certain sum, having paid a premium.
What are the types of surrender value in insurance?
There are two types of surrender value in insurance;
Guaranteed surrender value:
as an insured, you are sure to receive the guaranteed surrender value. This stands as long as you have paid a premium for at least three years. It has a fixed amount, which is 30% of the basic premium paid, excluding the first year premium. In guaranteed surrender, I exclude additional premium benefits or bonuses.
Special/ cash surrender value:
understanding paid up value is crucial to knowing the special surrender value. Assuming you stop paying premium after a specific period, although your policy continues, it would run with a lower sum assured. They call this lower sum the paid up value. Paid up value is therefore the lower sum a policy is assured to when you stop paying premium. On calculating the paid up value, you can then proceed to use the figure to get the special surrender value.
How do I calculate the surrender value in insurance?
Just as earlier said, the guaranteed surrender value is fixed, and does not require much calculation. However, the special surrender value requires a more complex calculation procedure. Firstly, you have to start by calculating the paid up value.
To calculate the paid up value, simply multiply the original sum assured by the ratio of the number of premiums you paid to the number of payable premiums. You would get the paid up value at maturity, or it goes to your benefactor after death. Now, if you decide to discontinue this premium, you would get a sum called the special surrender value. To calculate this, simply multiply the total paid up value (i.e. paid up value and bonus), by the surrender value factor.
They express the surrender value factor as a percentage of the paid up value plus the bonus. This factor is zero for the first three years, after which it keeps rising. They estimate it based on certain factors and differs from one company to another. Some factors taken into consideration while determining the surrender value factor are: completed policy years, with profit fund performance, policy type and time to maturity, etc.
Should I surrender my insurance or not?
The decision to surrender your policy only makes sense if the surrender value you would receive is more profitable than allowing the policy completes its tenure. Most of the time, surrendering a policy sees you lose out on all the benefits attached to the insurance scheme. You also receive a lesser amount than you would have on maturity of the policy. Therefore, it is important that you seek the advice of a professional to know what the best option is before deciding to surrender.
The surrender value in insurance is very tricky and not understood by a lot of customers. However, they put it in place to ensure that you do not lose all your premium in case the policy is terminated. The decision to surrender your policy should be strategic, and most of all, a better option than allowing the policy to mature, before you go for it.