Surrender value is the amount a policyholder receives from an insurance company if they terminate their whole life insurance policy before maturity. It includes the savings and earnings portion of premiums paid over 3 years, minus any surrender charges. Guaranteed surrender value is a minimum of 30% of premiums paid excluding the first year. Special surrender value factors in paid-up value and any bonuses, multiplied by the surrender value factor which increases each year after 3. An example calculates special surrender value as 30% of paid-up value plus bonuses after 4 years of premium payments.

1. Meaning and Nature

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”.

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.

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.

5. 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.
Guaranteed surrender value =
30per 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
◦ 30per cent of Rs 50,000 i.e. Rs 15,000.
Guaranteed surrender value =
30per cent of (Total premium paid - First-year premium)

8. ⚫ 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.”
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
⚫ 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.

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%:
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/