What is Surrender Value in Insurance?

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What is Surrender Value in Insurance? Blog Image


The Insurance and Regulatory Development Authority of India (IRDAI), recently released a crucial consultation paper on increasing the surrender value for life insurance policies.

About Surrender Value in Insurance

  • The surrender value of an insurance policy is the amount that the insurance company will pay the policyholder back when he or she decides to terminate the policy before maturity.
  • It applies only to those term insurance policies with a surrender benefit.
  • The surrender value is usually a percentage of the total premiums paid minus any applicable charges or fees.
  • How is the surrender value calculated? The surrender value calculation in term insurance policies varies from one insurance company to another. Generally, the surrender value is calculated based on the following factors:
    • Policy term: The longer the policy term, the higher the surrender value.
    • Premium paid: The higher the premium paid, the higher the surrender value.
    • Policyholder’s age: The younger the policyholder at the time of surrendering the policy, the higher the surrender value.
  • IRDIA rules for surrender value:
    • The IRDAI rules say that anyone with a term plan can give up their insurance policy.
    • However, only after the policy has been in effect for three years will the policyholder get the payout of the surrender value.
    • The IRDA decides what the policy's surrender value is for the first seven years.
    • From the third year on, the surrender value is up to 30% of the paid premium. It excludes the premium paid for the first year.
    • Between the fourth and seventh years, the surrender value could fall to up to 50% of the paid premium.
    • After seven years, the insurance company decides how much the premium should be.
    • The general rule is that the closer you are to your date of maturity when you surrender, the more money and benefits you get.

Q1) What is the Insurance and Regulatory Development Authority of India (IRDAI)?

It is an autonomous and statutory body established under the IRDA Act 1999. It is the apex body that supervises and regulates the insurance sector in India. It aims to protect the interests of policyholders, to regulate, promote and ensure orderly growth of the insurance industry in India.

Source: IRDAI's new proposal: Higher surrender value, lower charges for life insurance