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What Is Surrender Value in Life Insurance and How Is It Calculated?

What Is Surrender Value in Life Insurance and How Is It Calculated?

03/07/25

What Is Surrender Value in Life Insurance and How Is It Calculated?

If a policyholder stops their policy with the insurance company before its term ends, the insurance company will give them surrender value. The amount shows what your earnings and savings are minus any surrender charges you have been charged with. After the insurer takes out surrender charges, what is left is called the cash value.


Upon surrender, all associated insurance benefits will end. In the next step, the insurer pays you the accumulated funds. It is based on how much premiums are paid, bonuses and redemption value factors.


Types of Surrender Value

There are primarily two forms of early exit value, both of which are presented here:


1. Guaranteed Surrender Value (GSV)

A minimum amount, or the GSV, is available to you from your policy’s main document. This value is calculated based on how many premiums you have paid in percentage format. Most of the time, you have to make two or three years of premium payments before the value becomes available. But legislation changes now allow you to get GSV with a single-premium or limited-premium plan after one year.


For instance, when you pay three years of premiums, your policy could offer you back 30%–50% of the sum you have paid. Surrender value gets better the more time you spend with the life insurance. No matter the difference between the planned and final value, insurers have to fulfil their duty to pay the guaranteed value after the minimum payment period.


2. Special Surrender Value (SSV)

Under certain situations, such as meeting the policy bonus, enhancing fund performance, or the insurer’s wish, an insurer might add extra value. SSV is often higher than what is provided by GSV. This difference is bigger when a policy includes bonuses or has an investment part. To calculate a policy’s cash value, the insurer takes your paid-up sum assured, adds the bonuses you have earned, and deducts what bonds are earning these days. In the next step, the insurer checks the special and guaranteed values and pays whichever gives you the highest payout.


How Is It Calculated?

Calculation of such values is categorised in traditional endowment plans, ULIPs, and single premium polices. Here are presented the calculating factors for all of the policy surrendered values.


Guaranteed Surrender Value

These policies follow a simple process. First, you have to determine your paid-up sum assured, which adjusts the original coverage Special Surrender Value to reflect the ratios of premiums paid. For instance, you have been paying premiums for 10 years out of 20 for a ₹1 lakh policy with a 50% GSV of total premium return in 10 years. Then, the actual coverage will now be ₹50,000 under GSV. Any bonuses offered by the insurer over those years are also added to this amount.


Special Surrender Value

To calculate the amount you get in SSV. You have to calculate the paid-up amount plus any bonuses is converted to today’s value by using a rate that matches the ten-year bond yields, with a small increase for caution.


The SSV formula is: SSV = (Paid‑up value + Bonus) × Surrender‑value factor


For example, if you enrol to pay ₹20,000 every year for a 10-year policy and select a coverage of ₹2 lakh. If you stop making premiums after 5 years and the accumulated bonus is ₹30,000 with a surrender value factor of 40%. You will get ₹52,000.


Here is the calculated formula: SSV = (₹1,00,000+₹30,000)×0.40=₹1,30,000×0.40=₹52,000


ULIPs (Unit-Linked Insurance Plans)

ULIP surrender results are direct and linked to the current market’s performance. As your premiums go into equity, debt or hybrid funds. The cash value will be what’s left from your fund value minus any fund management costs and exit fees. In case you decide to surrender during the mandatory five-year term, your investments are put into a lower-earning fund, and certain penalties are charged. When the lock-in ends, you are able to use the complete fund value.


Single-Premium Policies

A single-premium policy allows you to get to your life insurance exit amount right after the end of the first year. Both the guaranteed and special values are computed with methods similar to those used in standard plans, by looking at your premium, adjusted sum assured, bonus accrued, and discount rates.

Both the guaranteed and special values are computed in single premium policies. These methods involve looking at your premium, adjusted sum assured, accumulated bonuses and discount rates.


Eligibility Criteria

There are different criteria followed for discontinuing life insurance polices, which are as follows.

  • Traditional Plans: You are able to get the early exit value after making the regular payments on a traditional plan for about 2-3 years.
  • ULIPs: Your investment in a unit-linked policy has to be for at least five years. Withdrawing your funds sooner than the period mentioned will result in your balance being moved to an account that pays less interest. If you take out your cash early, you are required to pay more fees.
  • Single-Premium Policies: With a single-premium plan, you can access the withdrawal amount just after one year. However, sometimes policyholders are still charged exit fees for surrendering the policy.

FAQs


1. Do all life insurance policies have a surrender value?

Let’s talk about some useful add-ons that can make your policy more robust:

Some policies do not give out cash in the form of benefits. A pure term insurance plan does not have any policy exit payout since its main purpose is to offer life cover. However, if you're wondering what is surrender value for life insurance?. Policies such as endowment, unit-linked insurance plans (ULIPs), and single-premium options accumulate policy value over time.


2. When does a policy start to accrue surrender value?

When you will reach your surrender value depends on the policy type and the arrangement for paying. When you hold a regular life insurance plan, the policy usually starts accumulating early exit value after paying for two or three years. According to the new regulations, the value of limited-premium and single-premium policies can increase in the first year just after purchase.


3. Is surrender value taxable?

Yes, surrender value can be taxable depending on whether your policy satisfies the conditions prescribed under Section 10(10D) of the Income Tax Act,1961. For instance, if your policy meets the conditions under Section 10(10D) of the Income Tax Act,1961, the early payout is usually tax-free. But if it does not meet these conditions, the amount you get as surrender value minus premiums paid may be taxed as income under the head Income from Capital Gain or Income from Other Sources as the case may be


4. How can I check my policy’s surrender value? Understanding what is surrender value for life insurance also involves knowing how to access it. Most insurers give you a clear chart at the start to outline the future value. You may use your insurance company’s website portal, their mobile application, or reach their customer service to find out the latest value of your policy.


5. Is it better to surrender or make the policy paid-up?

Deciding between surrendering or making a policy paid-up requires weighing immediate needs against long-term goals. A paid-up policy lets your insurance keep going with smaller benefits without needing more payments. On the other hand, surrendering gives you the saved cash value right away, which can help in financial emergencies.

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