Surrender Value in Life Insurance by Dr. Amitabh Mishra

1. Meaning and Nature
Dr. Amitabh Mishra

2.  Surrender value is also known as „cash value‟ or
„policyholder's equity‟.
 Surrender value is:
 “the amount the policyholder will get from the life
insurance company if he decides to exit the policy before
maturity”.
 “the sum of money an insurance company pays to a
policyholder in the event that his/her policy is voluntarily
terminated before its maturity or an insured event occurs”.
Dr. Amitabh Mishra

3.  Surrender value applies to the savings and earning
element of whole life insurance policies. From this
will be deducted a surrender charge, which varies
from policy to policy.
 A regular premium policy acquires surrender
value after the policyholder has paid the
premiums continuously for 3 years. Once insured
decide to exit the policy, all the benefits associated
with it, including the protection cover, will cease
to exist.
Dr. Amitabh Mishra

4.  As per a recent Insurance and Regulatory
Development Authority (IRDA) directive, life
insurance companies have been asked not to levy
surrender charges if the policyholder chooses to
terminate the cover after five years.
Dr. Amitabh Mishra

5. Dr. Amitabh Mishra
Types of
Surrender Value
Guaranteed
Surrender value
Special Surrender
value

6.  Guaranteed surrender value is payable after the
completion of 3 years. It is 30% of the premiums
paid.
 It exclude:
◦ Premium for the first year.
◦ Any additional premium paid for riders and
◦ Any bonus that you may have received from the insurer.
Dr. Amitabh Mishra
Guaranteed surrender value =
30 per cent of (Total premium paid - First-year premium)

7.  If you have paid Rs 75,000 (Rs 25,000 annually for
sum assured of Rs 5,00,000) in the first three years.
 (Rs 75,000 – 25000) = Rs 5,0000
 The minimum surrender value, you will get is
◦ 30 per cent of Rs 50,000 i.e. Rs 15,000.
Dr. Amitabh Mishra
Guaranteed surrender value =
30 per cent of (Total premium paid - First-year premium)

8. Dr. Amitabh Mishra
 Before special surrender value, we must
understand paid-up value.
 “If insured stop paying premium after a specified
period, policy will continue but with lower sum
assured. This reduced sum assured is called paid-
up value or paid-up sum assured”.
Paid up value = Original sum assured x (No. of premiums
paid/No. of premiums payable)

9.  “If insured discontinue the policy, the amount
insured will get is called the special surrender
value.”
 The surrender value factor is a percentage of paid-
up value plus bonus.
◦ It is zero for the first three years and keeps rising from third year
onwards.
Dr. Amitabh Mishra
Special surrender value =
(Original sum assured x (No. of premiums paid/No. of premiums
payable) + total bonus received) x surrender value factor
OR
Special surrender value =
(Paid up vale + total bonus received) x surrender value factor

10.  Suppose you pay Rs. 30,000 premium annually, for
a sum assured of Rs 6 lakhs and policy term being
20 years. Now, you stop paying after 4 years, the
bonus accumulated so far is Rs. 60,000 and
surrender value factor in 4th year is 30%:
Dr. Amitabh Mishra
Special surrender value =
(Original sum assured x (No. of premiums paid/No. of premiums payable) + total
bonus received) x surrender value factor
OR
Special surrender value =
(Paid up vale + total bonus received) x surrender value factor

11. ◦ Here:
 Original sum assured= Rs 600000/
 No. of premiums paid= 4
 No. of premiums payable= 20
 total bonus received= Rs. 60000/
 surrender value factor= 30%
◦ The special surrender value =
=(6,00,000 x (4/20) + 60,000) x (30/100)
= Rs. 54,000/
Dr. Amitabh Mishra

12. Dr. Amitabh Mishra

13.  There are two bases of calculating
surrender values:-
1. Accumulation Approach and
2. Saving Approach.
Dr. Amitabh Mishra
Bases of calculating
Surrender Values
Accumulation
Approach
Saving
Approach.

14.  Under this approach:
◦ Surrender value is the accumulation of overcharges
in the net premium, which upon the surrender of the
policy is no longer required to pay the amount of
claims, therefore, theoretically insurer should pay all
the accumulated reserve but if it is allowed, the
insurer will be left a very small amount for meeting
other obligations because a huge expenses are
involved at the time of surrender.
Dr. Amitabh Mishra

15.  The surrender value can be the largest amount
which the insurer can pay without going into
loss.
 The full amount of reserve to a particular
policy cannot be given as a surrender value
because there are certain expenses and loss
because of surrendering the policies.
 Thus,
Dr. Amitabh Mishra
Surrender Value = Full Reserve-Surrender Charges

16.  An insurer is responsible for payment of claims whenever it may
arise; but if a policy is surrendered, the insurer is relieved of its
obligation for payment of the assured sum. He is in a position to
save something due to non-payment of claims.
 Thus, where the insurer is relieved of the responsibility of payment
of claims, he is in a position to return some amounts to the
insured. But where he may not be required to pay the claims, he is
not relieved of the responsibility and no surrender value can be
given to the policyholders.
Dr. Amitabh Mishra

17.  The surrender value on a policy can be
calculated as below:
Dr. Amitabh Mishra
Surrender Value =
(Sum assured + Accumulated value of future expenses + Future
reversion ally bonus, if participating policy) – (Accumulated value
of all future premiums + expenses incurred in processing the
surrender value).

18. Dr. Amitabh Mishra

19. Dr. Amitabh Mishra