Paid-up policy
Also written Paid-up value
An investment-cum-insurance policy that continues without further premiums after the policyholder stops paying, with the sum assured cut in proportion to premiums paid versus premiums due.
In plain language
When a policyholder cannot keep paying premiums on an investment cum insurance policy, there are three possible outcomes. The policy can lapse, in which case no claim is payable. It can be surrendered for its surrender value, if it has acquired one. Or it can be made paid-up.
A paid-up policy stays in force without any more premiums, but for a smaller amount. The workbook's rule: the sum assured is proportionately reduced to the same proportion that the number of premiums paid bears to the total premiums due.
It is the option that keeps some cover and some benefit alive when cash flow breaks down, without walking away from what has already been paid.
How it works
The formula is a straight proportion:
Paid-up sum assured = Original sum assured × Premiums paid ÷ Total premiums due
Count premium instalments, not years — the premium mode matters.
The workbook example. Surinder took a 25-year investment cum insurance policy with a sum assured of Rs 10,00,000, premiums payable half-yearly. After paying for 5 years, he cannot continue.
- Total premiums due = 25 years × 2 = 50
- Premiums paid = 5 years × 2 = 10
- Paid-up sum assured = 10,00,000 × 10 ÷ 50 = Rs 2,00,000
Where it sits among the options:
| Option | Policy continues? | What the policyholder gets |
|---|---|---|
| Lapse | No | No claim payable (revival possible within the insurer's timeframe by paying pending premiums with penalty) |
| Surrender | No | Surrender value now — minimum 30% of premiums paid under the workbook's rules, once eligible |
| Paid-up | Yes, reduced | The reduced sum assured on the policy's terms, with no further premiums |
Only investment cum insurance policies have this option. Pure protection (term) policies acquire no value and simply lapse.
The formula
Paid-up sum assured = Sum assured × (Number of premiums paid ÷ Total number of premiums due)
Workbook: 10,00,000 × 10 ÷ 50 = 2,00,000
A worked example
Illustrative figures, applying the workbook's formula.
Meenakshi has a 20-year endowment policy with a sum assured of Rs 15,00,000, premiums payable quarterly. She has paid for 6 years and has lost her job.
Total premiums due = 20 × 4 = 80
Premiums paid = 6 × 4 = 24
Paid-up sum assured = 15,00,000 × 24 ÷ 80 = Rs 4,50,000
The common error is to use years: 15,00,000 × 6 ÷ 20 gives the same Rs 4,50,000 here only because every year had the same number of instalments. It breaks the moment a policyholder stops mid-year. Had she paid 6 years and one quarter (25 instalments), the paid-up sum assured is 15,00,000 × 25 ÷ 80 = Rs 4,68,750; a years-based calculation cannot capture that last quarter.
Comparing her options with an annual premium of, say, Rs 70,000 (Rs 4,20,000 paid so far):
| Option | Result |
|---|---|
| Let it lapse | No claim payable |
| Surrender | At least 30% × 4,20,000 = Rs 1,26,000 now |
| Make it paid-up | Policy continues with a sum assured of Rs 4,50,000, no more premiums |
If she needs cash urgently, surrender or a loan against the policy may be right. If she does not, paid-up keeps more of the value she has already paid for working.
Why NISM asks about it
Chapter 2 (Life Insurance Products), section 2.1, in the elements of life insurance products alongside policy lapse and surrender value. The Surinder example is the template for the numerical question — watch the premium mode.
Common exam traps
- Count instalments, not years. Half-yearly premiums over 25 years are 50 premiums, not 25.
- Paid-up keeps the policy alive; surrender ends it and pays out.
- A lapsed policy pays no claim. Paid-up is the way to avoid that outcome without paying more premiums.
- Term insurance cannot be made paid-up — only investment cum insurance policies acquire value.
- The reduction is proportional to premiums paid versus premiums due, not to the fund value or the surrender value.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Endowment policyA life insurance policy that pays the sum assured plus accrued bonus on survival to the end of the term as well as on death — an investment-cum-insurance contract with a level premium.
- Policy lapseThe state of a life insurance policy on which the premium was not paid even within the grace period, so no claim is payable — though a traditional policy may still carry a surrender or paid-up value.
- Surrender valueThe amount an insurer returns when a policyholder discontinues an investment-cum-insurance policy early — at least 30% of premiums paid under the workbook's rules, rising to 90% near maturity.
- Term insuranceLife cover for a fixed period: if you die during the term your nominee receives the sum assured, and if you survive it nothing is paid back. It is the cheapest way to buy protection.
- Unit Linked Insurance PlanA life insurance policy in which the premium, after the cost of risk cover and expenses, is invested in equity or debt funds chosen by the policyholder, so the maturity value is the fund value.
- Accrued bonusThe bonus a participating investment-cum-insurance policy earns each year after its guaranteed-bonus period ends — declared annually at the insurer's discretion but paid only with the sum assured, at maturity or death.
- Discontinuation policy fundThe fund a lapsed or surrendered ULIP's balance value moves into during the 5-year lock-in, once the capped discontinuation charge is deducted — insurance cover stops, but the money stays locked until the lock-in ends.
- Survival benefitThe life insurance benefit paid when the insured survives a specified period - the half of a policy that a pure term plan does not have, and the reason an investment cum insurance policy costs more.