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Want to discontinue a life insurance policy? Surrender vs Paid Up Comparison

You don’t think you bought the right insurance policy, and want to stop paying the premiums. In most cases, you have two options – you can surrender the policy, or make it paid up. Which one is better?



If you are thinking of discontinuing an insurance policy or want to stop paying the premiums for a policy, you are not alone!

Many people want to terminate their policies, because:

  • They realize they bought the wrong policy, as it was mis-sold to them
  • The policy looked attractive at the time of purchase, but not any more
  • There are better and / or cheaper options available
  • Your parents bought the policy when you were a child, and you don’t want to continue paying the premiums

Well, what should you do in this case? You have two options: Surrender the policy, or make it paid up.


Surrendering a Life Insurance Policy

This is quite straight forward – this means you are completely canceling your policy.

When you do this, you get an amount known as the “surrender value” of the policy. It is calculated based on the number of premiums paid, the total number of premiums, etc.

(Want to demystify insurance jargon? Check out “What is surrender value, paid up value and fund value of a life insurance policy?”)

You do not have to pay any premium after surrendering the policy, and you do not get any life insurance cover.

You can not surrender a policy before you have paid premiums for 3 years. If you want to cancel a policy before 3 years, you would forego all the premiums paid.

Example

Let’s say you had bought a policy with sum assured of Rs. 5 Lakhs. It had a tenure of 10 years, and you paid premiums for 4 years. The accrued bonus is Rs. 1,00,000.

In this case, if you surrender the policy, you would get:

Original sum assured * (Number of premiums paid / Total number of premiums that were required to be paid) + Accrued bonuses * Surrender value factor

That is,

Rs. 5,00,000 * (4 / 10) + (Rs. 1,00,000 * 0.3)
= Rs. 2,00,000 + Rs. 30,000
= Rs. 2,30,000


Making a life insurance policy “paid up”

Another option that may be available to you (it depends on the policy) is to make a policy “paid up”.

When you make a policy paid up, you don’t have to pay any more premiums. However, your insurance cover (for a reduced amount) continues till the maturity of the policy.

How much is the cover? It is called the paid up value, and is in proportion to the number of premiums paid.

Paid up value = Original sum assured * (Number of premiums paid / Total number of premiums that were required to be paid)

Please note that although the insurance cover continues, you would not be eligible for any future bonuses declared by the insurance company. However, you would retain any bonuses paid out before you made the policy “paid-up”.

You do not get any amount when you convert a policy to “paid up”. Instead, you get an amount equal to the paid up value (plus any bonuses accrued before you made the policy “paid-up”) at the time of maturity, or in case of your early demise.

Example

Let’s continue with the same example: Sum assured of Rs. 5 Lakhs, tenure of 10 years, and premiums paid for 4 years. The accrued bonus is Rs. 1,00,000.

If you make the policy paid up, the new sum assured would be:

Rs. 5,00,000 * (4 / 10)
= Rs. 2,00,000

Thus, a cover of Rs. 2,00,000 would be available to you till the policy matures – that is, for another 6 years.

At the end of 6 years, you would receive Rs. 2,00,000 + Rs. 1,00,000 = Rs. 3,00,000.

In case of your untimely death, your nominee would receive Rs. 3,00,000.


Quick Comparison






Surrender a Policy Make a Policy Paid Up
Stop paying premiums immediately? Yes Yes
Get money immediately? Yes No
Insurance cover continues? No Yes
Get money at the end of the tenure? No Yes

Which is better: Surrender or “Paid Up”?

So, what should you do? Should you surrender your life insurance policy, or make it paid up?

Although most people advise that making a policy paid up is better, there is no clear cut answer.

People argue that the amount you receive when you make a policy paid up is far more than the surrender value, and therefore, surrendering should never be done.

However, let’s not forget that you only get the amount at the time of maturity of the policy – which can be years away. And although the amount looks bigger, its actual value (purchasing power) can be very less due to the effect of inflation.

(Check out more about this at “Saving enough is not enough – Effect of Inflation on Savings”)

A note on Term Insurance

The above discussion is true only for participatory (insurance + investment) type of policies. It is not applicable to term plans and policies.

(Term policies are the best way to buy insurance. Please read “Term policy (term insurance) is the best policy” for more)

In case you want to stop a term plan, you can simply allow the policy to lapse by not paying the premiums.

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