Surrender value
Also written Cash value · Guaranteed surrender value
The 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.
In plain language
A pure term policy has no savings inside it, so stopping it returns nothing. An investment cum insurance policy is different: part of each premium builds a value, and a policyholder who stops paying may be entitled to some of it back.
If a premium is not paid even within the grace period, the policy lapses and no claim is payable on a lapsed policy. However, a traditional investment cum insurance policy that has been in force for at least 3 years (2 years if the term is less than 10 years), on which full premiums have been paid, may acquire a cash value or surrender value, which is returned to the policyholder.
Pure protection policies do not acquire any surrender value — which is also why no loan can be taken against them.
How it works
Traditional policies — the workbook's figures:
| Policy | Guaranteed surrender value |
|---|---|
| Regular premium | Minimum 30% of all premiums paid, going up to 90% in the last two years |
| Single premium | From 70% of total premium if surrendered within the first three years, to 90% in the last two years |
The insurer may also pay an amount based on the current value of the assets held against the policy.
ULIPs. A ULIP has a 5-year lock-in. Surrendering before 5 years is possible, but a discontinuance charge of a maximum of Rs 6,000 is levied, and the balance fund is transferred to a discontinuance policy fund; the surrender value is paid only at the end of the lock-in. No surrender charges apply after 5 policy years.
The alternative to surrender is to make the policy paid-up: the sum assured is reduced in the proportion that premiums paid bear to premiums due, and the policy continues.
Loans. Most insurers offer a loan against the surrender value of investment cum insurance policies, usually at lower rates than banks and NBFCs charge against the same policies.
A worked example
Illustrative figures, applying the workbook's percentages.
A regular premium endowment policy. Mr Kulkarni has paid Rs 60,000 a year for 4 years on a 20-year policy — Rs 2,40,000 in all — and wants out.
Minimum guaranteed surrender value = 30% × 2,40,000 = Rs 72,000
He gets back Rs 72,000 of the Rs 2,40,000 paid, plus any amount the insurer pays based on the value of assets held against the policy. The workbook's broader point applies: the return inside a traditional policy is normally low, and leaving early crystallises that.
A single premium policy. Mrs Rao paid Rs 5,00,000 once and surrenders in year 2:
Guaranteed surrender value = 70% × 5,00,000 = Rs 3,50,000
A ULIP in year 3. Mr Sethi's fund value is Rs 3,20,000. The discontinuance charge is capped at Rs 6,000, so Rs 3,14,000 moves to the discontinuance policy fund — and he receives it only after the 5-year lock-in ends.
What an adviser checks first. Would a loan against the surrender value, or making the policy paid-up, meet the need without accepting a 70% loss on Mr Kulkarni's premiums?
Why NISM asks about it
Chapter 2 (Life Insurance Products), section 2.1 on elements of life insurance products — policy lapse, surrender value and paid-up policies — and 2.4 on loans against policies; Chapter 1, section 1.8.2, on ULIP rules. Expect the percentages (30% minimum, 90% in the last two years; 70% for single premium) and the ULIP discontinuance charge cap of Rs 6,000.
Common exam traps
- Term policies have no surrender value — and so no loan against them.
- Regular premium: minimum 30% of premiums paid. Single premium: 70% in the first three years. Both rise to 90% in the last two years.
- The 3-year condition becomes 2 years if the policy term is less than 10 years.
- A ULIP surrendered within 5 years does not pay out immediately. The fund, less a charge of at most Rs 6,000, sits in the discontinuance policy fund until the lock-in ends.
- Paid-up is not surrender. Paid-up keeps a reduced policy alive; surrender ends it.
- Check the current rules. These figures are the workbook's. IRDAI has since revised product regulations, including the treatment of surrender values, so confirm the rules applying to a specific policy before advising on it.
Check yourself
1.What is the minimum guaranteed surrender value on a regular premium traditional policy?
- a)30% of all premiums paid, going up to 90% in the last two years
- b)70% of all premiums paid, going up to 90% in the last two years
- c)50% of all premiums paid throughout
- d)There is no guaranteed surrender value
Show the answer
Answer: (a) 30% of all premiums paid, going up to 90% in the last two years
The minimum surrender value will be 30% OF ALL PREMIUMS PAID AND GOES UP TO 90% IN THE LAST TWO YEARS. The 70 per cent figure belongs to a different policy type: for a SINGLE PREMIUM policy, the guaranteed surrender value will range from 70% of total premium paid if surrendered within the first three years to 90% in the last two years.
2.Why is it not possible to take a loan against a pure protection life insurance policy?
- a)Because IRDAI prohibits lending against life policies
- b)Because pure protection policies do not acquire any surrender value
- c)Because the nomination would be cancelled
- d)Because the policy term is too short
Show the answer
Answer: (b) Because pure protection policies do not acquire any surrender value
PURE PROTECTION POLICIES DO NOT ACQUIRE ANY SURRENDER VALUE AND HENCE IT IS NOT POSSIBLE TO GET A LOAN AGAINST THEM. By contrast, most insurance companies offer a loan against the surrender value of INVESTMENT CUM INSURANCE policies, and banks and NBFCs may also lend against such policies, though usually at higher interest rates than the insurer itself charges.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- 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.
- 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.
- Paid-up policyAn 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.
- 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.
- 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.
- Accelerated sum insuredA critical-illness or disability rider that pays out of the same sum assured as the life cover, so a claim reduces the death benefit — cheaper than a rider that pays an amount over and above the life cover.
- 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.
- ULIP liquidity rulesWhen money can leave a ULIP: a 5-year lock-in with no redemption, surrender possible but paid only at the end of the lock-in, partial withdrawal allowed after it, and revival of a lapsed policy within 3 years.
- Waiver of premium riderA life insurance rider, bought for an extra premium, that is triggered where a disability or a loss of income makes it difficult for the policyholder to pay the premium.