Calculating the cash surrender value of a life insurance policy

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NEW DELHI : Life insurance is a long-term commitment and there are unfortunate times when you may need to surrender your policy. In other words, it means terminating the contract before it expires. So if you redeem a medium-term policy, you will get a sum (surrender value) of what has been allocated to savings and income. In addition, surrender charges are also deducted from this amount, which vary from policy to policy. In this article, we take a look at how the cash value of a life insurance policy is calculated.

What is a cash value?

Cash value is the amount a policyholder receives from the life insurer when they decide to terminate a policy before it expires. Suppose that the policyholder decides on a mid-term surrender; in this case, the amount allocated to earnings and savings would be paid to him. Redemption costs are deducted from this according to the contract.

Rakesh Goyal, Director of Probus Insurance, said: “A recent directive from the Insurance Regulatory and Development Authority of India (Irdai) states that the policyholder cannot levy surrender charges if the policy is terminated after five years. Termination of the insurance plan would result in termination of plan benefits, including coverage.”

Types of Cash Value

There are two types of cash value: guaranteed cash value and special cash value.

Guaranteed cash value

The guaranteed surrender value is only payable to the policyholder after three years. This value represents only 30% of the premiums paid for the plan. Also, this excludes the premium paid for the first year, any additional fees paid for endorsements and bonuses (that you may have received).

“For example, suppose you paid Rs30,000 (Rs10,000 per annum x 3) in the first three years for an insured sum of Rs3 lakh, the minimum cash value you can get is 30% of Rs20 000, which is 6,000 (excluding first-year bonus),” Goyal said.

Special cash value

To understand this, one must first know what released value is. Suppose the insured stops paying the premium after a specific period, the policy would continue, but at a lower insured amount, called paid-up value. The paid-up value is calculated as the original sum insured multiplied by the quotient of the number of premiums paid and the number of premiums payable.

When canceling a policy, you get a special cash value, which is calculated as the sum of the paid-up value and the total bonus multiplied by the cash value factor.

“Suppose you pay Rs 15,000 on an annual basis for an insured sum of Rs 3 lakh for an insurance term of 20 years. You stopped paying the premium from the fourth year. Here, suppose the bonus is Rs30,000 and the value factor is 30%, then the paid-up value will be equal to 60,000 and the special surrender value will be equal to {(60,000 + 30,000) x (30/100) }, i.e. 27,000 rupees,” Goyal said.

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