Surrender Value of ULIP: The Real Calculation - PNB MetLife
Tarun Chugh, MD & CEO, PNB MetLife 01-08-2019 11:31:06 AM
We avail a life insurance policy to get coverage for risk of the uncertainty of life and for financial security. However, you may end up surrendering a policy before maturity for a variety of reasons. This is true for both the traditional life insurance policies as well as ULIPs. If you have been caught unawares, ULIPs are unit-linked insurance plans, that allow you to invest into an underlying equity fund or debt fund or balanced fund in accordance with your preferences while simultaneously providing you with a life insurance cover. ULIPs, with their dual benefits, can cater to a variety of your financial and investment needs. Read More
But what happens when things go awry or when circumstances force you to surrender the policy before maturity? How does the process of premature policy termination work for ULIPs?
When you choose to terminate the policy before its maturity, the process is governed by the concept of ‘Surrender value.’
What is surrender value?
Surrender value is the sum of money an insurance company pays to the policyholder in the event of his policy being voluntarily terminated before its maturity or the insured event occurring. It essentially means that if the policy is dissolved any time before the maturity date mentioned on the policy papers, you will be in receipt of the surrender value of ULIP plan or other insurance plans.
How is surrender value calculated?
It is important for you to note that a policy acquires surrender value only when premiums for a certain number of years have been paid to the insurance company. Usually, if the premium for the first 2 or 3 policy years is paid in full, the policy acquires a surrender value. Additionally, note that not all policies acquire this surrender value. Surrender value exist only in investment-cum-insurance policies like endowment plans, money back plans and unit-linked insurance plans (ULIPs), a term insurance policy may not acquire surrender value .
In other words, only policies with a savings component will return the amount invested for life insurance in the form of this surrender value.
If your Policy has acquired a Surrender Value, and you choose to discontinue your Policy, you will be entitled to the Surrender Value, which is higher of the Guaranteed Surrender Value (GSV) or Special Surrender Value (SSV) of the policy. The policy will be terminated once it is surrendered and cannot be revived.
You are eligible to receive GSV, if you have paid premiums for at least three years. It is 30 percent of the basic premiums paid, excluding the first-year premium. The additional premium for riders such as accidental death benefit is excluded from this calculation please refer your policy document for the insurance policy to get the exact percentage and calculation formula.
On the other hand, we have the Special Surrender Value (SSV), for which the concept of paid-up value is imperative. Paid-up value is calculated by multiplying the original sum assured and the ratio of the number of premiums paid to the number of premiums payable.
Thus, Paid up value = original sum assured * (No. of premiums paid/No. of premiums payable)
If you discontinue the policy, the amount you will get is called the special surrender value. This is arrived at by multiplying the total paid-up value (paid-up value + bonus) with a multiplier called the surrender value factor.
Other insurers may use a different method for surrender value calculation in ULIPs, in most of the cases the fund value of the underlying fund or value of discontinuance fund will be provided to the policyholder at the time of surrender of policy.
Should you surrender?
By surrendering a policy, it goes without saying, you lose out on all the benefits of the insurance policy and the amount received upon. Such surrender make you lose out on a chunk of the premium paid in the initial years. So, when you have a financial situation at hand you can prioritize accordingly or if you can invest in a product with higher returns, you should choose to surrender.
The aforesaid article presents the view of an independent writer who is an expert on financial and insurance matters. PNB MetLife India Insurance Co. Ltd. doesn’t influence or support views of the writer of the article in any way. The article is informative in nature and PNB MetLife and/ or the writer of the article shall not be responsible for any direct/ indirect loss or liability or medical complications incurred by the reader for taking any decisions based on the contents and information given in article. Please consult your financial advisor/ insurance advisor/ health advisor before making any decision.
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