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What is surrender value, paid up value and fund value of a life insurance policy?

We keep hearing many words when it comes to life insurance policies. Let’s understand some of them.

The world of finance is full of jargon. And life insurance is no exception!

There are many jargon-y words associated with life insurance policies. Have you ever wondered what terms like “surrender value” and “paid up value” mean?

Let’s understand some of the commonly used terms related to various “values” of a life insurance policy.

 

Surrender Value

“Surrender value” of a policy is the amount you would receive from the insurance company if you surrender the policy to the company before its expiry.

That is, if you want to discontinue (or cancel or terminate – it has different names) a policy before it matures, this is the amount you would receive from your life insurance company.

The surrender value is paid to you at the time of discontinuation of the policy.

The surrender value consists of a portion the premiums paid by you, plus any bonuses accrued. The surrender value is calculated by the insurance company depending upon the time for which the policy was in effect (the age of the policy), the total duration of the policy, the premiums paid and any bonus accrued.

Surrender value also takes into account any accrued bonuses, but after reducing them by a factor called “surrender value factor”. The surrender value factor depends on the number of premiums paid and remaining.

The policy needs to be in force for at least 3 years before it attains a surrender value. That is, you need to have paid premiums for at least 3 years before you can surrender the policy. Thus, if you surrender the policy after say 2 years, you would lose the premiums paid.

The company may have a condition of minimum years before any bonuses are paid as a part of the surrender value.

In the initial years (say when the policy is 4-5 years old), the surrender value of an insurance policy is usually quite less. This is to discourage you from withdrawing early from your insurance, which is actually a long term contract between you and the insurance company.

 

Paid Up Value

Paid up value is the amount to which your sum assured would be reduced if you discontinue paying the premiums.

Let me explain.

Say you want to discontinue paying the premiums for an insurance policy. One option is making the policy paid up instead of actually canceling it.

(Please come back to read “Want to discontinue a life insurance policy – Surrender vs Paid Up” for more)

When you make it paid up, the policy is not cancelled. Instead, you don’t have to pay any premiums, and the policy continues with a reduced “sum assured”.

This reduced sum assured is called the paid up value of the policy.

Paid up value is calculated as a proportion of premiums paid versus the premiums actually needed to be paid.

Thus,

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

 

Fund Value

This is a term that applies only to a Unit Linked Insurance Plan, or a ULIP.

Many charges are deducted from the premium that you pay for a ULIP. A portion goes towards the charge for providing the actual insurance (mortality charge), and there are other charges like fund management charge, administration charge, etc.

(Want to know what these charges mean? Please come back to read “Charges for a ULIP: Fund management, mortality, administration and more”)

The number of units that you are ultimately issued is after considering all these charges. The fund value is the value of all the units that you hold in a ULIP.

Thus,

Fund Value = Number of units * NAV of the unit

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