Insurance

Deciding to purchase life insurance can seem overwhelming. The idea is to protect your family
financially if anything happens to you. Most people opt for life insurance when they have
large financial responsibilities or if they have people who depend on them financially. But
what happens if circumstances change? Can individuals opt out of their policy if they no longer
require life cover? Let’s find out.

What Is the Surrender Value of a Life Insurance Policy?

A policyholder can opt to discontinue a life insurance policy before the plan’s maturity date.
Should anybody choose to surrender their policy mid-way through the term, they will not
receive the entire maturity amount. Instead, they will receive a portion of the sum, which is
referred to as the surrender value of the policy.

Types of Surrender Values

When you read your policy documents, you may come across two types of surrender values:

 Guaranteed Surrender Value

The guaranteed surrender value amount is usually mentioned in policy documents. If

you have paid the premium for three consecutive years, you are eligible to receive the
amount you choose to surrender your policy. The amount is equal to all the premiums
paid so far, excluding the first premium amount and the premium amount for additional
benefits or riders. The surrender value will not include any bonus amount you might be
eligible for on the plan’s maturity.

 Special Surrender Value

The special surrender value gets calculated in cases where the policyholder stops
paying premiums, but the plan continues until they choose to surrender it. Once the
premium payments stop, the sum assured may decrease and the lower amount is
known as the paid-up value. You can calculate the amount by multiplying your original
sum assured with the total number of premiums paid. You then need to divide the
amount by the total premiums payable. For example, you pay INR 15,000 per year. You
have a sum assured of INR 3,00,000 and the policy tenure is 20 years. You may stop
paying premiums from the fourth year.

Let’s calculate your paid-up value.

Paid-Up Value = Original Sum Assured x (No. of Premiums Paid / No. of Premiums Payable)
Paid-Up Value = 3,00,000 x (4/20)
Paid-Up Value = 3,00,000 (x1/5)
Paid-Up Value = INR 60,000

To calculate the special surrender value, you also need to know your surrender value factor.
The number remains at 0 for the first three years. It then increases every subsequent year.
Various companies decide their own surrender value factor. For example assume you stop
paying premiums in/ from the fourth year, we can use a surrender value factor of 30%. In the
four years, you earn a bonus of INR 30,000 Let’s use this information to calculate your special
surrender value.

Special Surrender Value = (Paid-Up Value + Bonus) x Surrender Value Factor

Special Surrender Value = (60,000 + 30,000) x (30/100)
Special Surrender Value = 90,000 x (30/100)
Special Surrender Value = INR 27,000

Do All Life Insurance Policies Offer a Surrender Value?

When you choose to surrender a life insurance policy, you must be careful. Policies like term
plans, which do not offer any maturity benefits, do not have a surrender value. If you choose
to terminate these policies mid-term, you are not eligible to receive any kind of payout. Life
insurance policies such as Unit-Linked Insurance Plans (ULIPs) or endowment plans will
provide you with a surrender value as long as you have paid your premiums for at least three
years.

What Is Surrender Value Fees?

The surrender value fee is amounts that your insurer will charge you when you decide to
terminate your policy before the agreed-upon date.

Understanding the Difference between Surrender Value and Cash Value

Many people use the terms ‘surrender value’ and ‘cash value’ synonymously. Unfortunately,
this isn’t true. Your policy’s cash value refers to the actual amount your policy is worth as a
direct result of the premiums paid and the returns earned on that amount.

The surrender value, on the other hand, refers to the amount you will receive when you
terminate your policy early. It is only a part of the actual cash value since the insurance
company will not return the initial premium or any bonuses.
Is Surrendering My Policy a Good Idea?

In dire financial situations, some people feel they have to surrender their life insurance policy
for quick liquidity. Surrendering a plan may not be prudent for two reasons. First, it gets rid
of your life coverage and maturity bonus amounts, which could prove beneficial to you and
your family members at a later stage.

Secondly, it will provide you with a sum lower than the actual cash value of your policy.
Instead of surrendering a life plan, you can choose to take out a loan against the policy. Some
insurance plans allow you to borrow directly from the corpus you’ve built up so far. If you do
not have that option, you can provide your life policy as collateral for a loan from a financial
institution. You can choose to keep your policy active and still get the liquidity you need
immediately.

Loan against the Policy

A life insurance policy is a versatile investment option today. It not only provides protection
cover but also gives an insured the benefit of availing a loan against the policy. A lower rate
of interest is charged in comparison to a personal loan for loans against life insurance policy.
Further, the policy value remains unchanged.

However, you must bear in mind the following factors before buying a loan against life
insurance policy:

Are you eligible?

Not all life insurance policies provide a loan. You will be allowed to take a loan against the
surrender value of permanent or whole life insurance but not against term insurance plan.
Further, only upon timely payment of premiums for at least three years that you can avail a
loan in case of non-term plans.

While you may not have to go through intense scrutiny while availing a loan on your own
policy and your income too does not really come under question, your credit ratings might be
considered.

Amount of loan

You will have to check with the company on the amount of loan you are eligible for. The loan
amount is a percentage of its surrender value. It can be up to 85-90% against
traditional insurance plans with guaranteed returns. For ULIP plans, loan amount will depend
on the current value of the corpus and the type of fund.

However, this loan amount is not considered as an income and is very much taxable.

Rate of interest

The interest rate charged is based on the premium that has already been paid and the number
of premiums. The more the amount and number of premiums, the rate of interest will be
lower.

Documentation

Only your insurance company can guide you on the kinds of documentation required for
availing loans. A form will have to be filled, and the original insurance policy will need to be
submitted. You may have to sign a deed of assignment. The policy acts as collateral till the
loan is repaid.

Premiums

You will continue to pay premiums even after availing loan.

Loan repayment

The loan needs to be repaid during the term of the policy. You can either pay back the
principal along with interest or only the interest amount. If one pays only interest, at the time
of settlement, the due principal amount will be deducted from the claim amount. Further, in
the event of your death during the loan term, the pending amount due will be deducted from
the claim amount. So your nominee will receive only the remaining amount and not the full
sum assured.

Therefore, it is important to pay back the loan on time or else the interest keeps adding to
the balance. This can lead to loan amount exceeding the policy's cash value, thereby causing
the policy to lapse. This could lead to payment of taxes on cash value . In case of non-payment
of the loan, the loan amount will be taken from the accumulated surrender value of the policy
and your policy will be terminated.

Bonus refers to an extra amount of money one receives in addition to the base amount. The
same concept also holds true with bonuses payable in a life insurance policy. In life insurance,
it is an amount which gets accumulated under the policy on a yearly basis and it is payable on
 the death of the life assured, surrender or at maturity of the plan, whichever occurs earlier.
This bonus amount is payable over & above the benefits applicable under a life insurance
policy.

Which policies are eligible for Bonuses?

Not all life insurance policies are entitled to receive the bonus amount. Only participating
(with-profit) policies qualify for the bonus and the policyholders holding a participating life
insurance policy will only qualify for the bonus payout. The participating policies take part in
the investment profits of the insurance company which is shared with the policyholders in the
form of bonus payment. The amount of bonus payable is not fixed and it may vary depending
on the amount of investment income earned by the insurance company.

The bonuses are a percentage of the sum assured and these are declared at the end of every
financial year. When declared, it becomes guaranteed. The insurance company has the
discretion to decide on the rates of bonus. The policyholder receives 90% of the profits as the
bonus and the remaining 10% of the surplus is kept for shareholders.

Types of Bonuses

Bonuses are categorized under four types for a participating life insurance policy.

1. Reversionary Bonus

The profits allocated to each participating policy are paid in the form of a Reversionary Bonus.
A reversionary bonus adds value to the total amount payable to the policyholder or nominee.
A reversionary bonus is usually declared at the end of every financial year and it is payable at
the time of a claim.

There are two common types of reversionary bonuses, as specified below.

 Simple Reversionary

The simple reversionary bonus is calculated as a percentage of the sum assured. It is declared
as per thousand of the sum assured every year.If the Simple Reversionary Bonus rate is Rs 50
per thousand of sum assured and sum assured of the policy is Rs 10 lakhs.

Bonus = 50 x (10,00,000/1000) = Rs 50,000

 Compound Reversionary
The compound reversionary bonus is also computed as a percentage rate, but it applies to
the sum assured and to all the accrued bonuses previously available in the policy. The bonus
of each year is added to the sum assured and the next year's bonus is calculated on that the
total amount. These bonuses increase with time due to compounding effect.

If the compound reversionary bonus of 5% is declared for the entire policy term and sum
assured of the policy is Rs 10 lakhs. During the first year, the accrued Compound Reversionary
Bonus (CRB) will be Rs 50,000 i.e., (5% of 10, 00,000). In the second year, this Rs 50,000 will
be added to the sum assured of 10, 00,000, and now the bonus would arrive at 52,500 [5% of
(10,00,000 + 50,000)].Compound reversionary bonus will increase year by year due to
compounding impact.

2. Interim Bonus

Bonuses are usually declared at the end of the financial year. But, in case a policy matures or
death occurs in between the two successive bonus declaration dates, the interim bonus is
then payable. This bonus is calculated for the remaining days from the last bonus date.

3. Terminal Bonus

Terminal bonus (final bonus) is declared and added only for policies, which attain maturity.
This bonus is offered to the policyholders for keeping the policy till its maturity date. This
bonus thus will not be payable for policies which have been surrendered or for policies which
have acquired paid-up value.

4. Cash Bonus

The cash bonus accrued in a year will be paid in the form of cash at the end of the financial
year. This bonus is payable on a yearly basis rather than at maturity.

In a Nutshell,

These are the various types of bonuses payable and it may vary, depending upon the life
insurance policy chosen and the insurer you opted for. It is advisable to check the type of
bonuses applicable. You may check in the plan brochure or ask the agent regarding the bonus
rate applicable to your policy. Also, you may see the past trends of bonus allocations to give
you a better picture about the disbursement of different types of bonuses by the insurance
company. It will help you get a clear idea about the bonus benefits you will be entitled for,
upon buying a particular life insurance policy which is participating in nature.

20- Yrs. Money Back Plan

Benefits:

A. Death benefit:
Death benefit payable in case of death of the Life Assured during the policy term provided the
policy is in-force (i.e. all due premiums have been paid) shall be “Sum Assured on Death”
along with vested Simple Reversionary Bonuses and Final Additional Bonus, if any. Where
“Sum Assured on Death” is defined as higher of 125% of the Basic Sum Assured or 7 times of
annualized premium. This death benefit shall not be less than 105% of the total premiums
paid up to the date of death.
The premiums mentioned above exclude taxes, extra premium and rider premium, if any.

B. Survival Benefits:

In case of Life Assured surviving to the end of the specified durations provided all due
premiums have been paid, 20% of the Basic Sum Assured shall be payable at the end of each
of 5th, 10th & 15th policy year.

C. Maturity Benefit:

On Life Assured surviving to the end of the policy term, provided the policy is in-force, “Sum
Assured on Maturity” along with vested Simple Reversionary Bonuses and Final Additional
Bonus, if any, shall be payable. Where “Sum Assured on Maturity” is equal to 40% of the Basic
Sum Assured.

D. Participation in Profits:

The policy shall participate in profits of the Corporation and shall be entitled to receive Simple
Reversionary Bonuses declared as per the experience of the Corporation, provided the policy
is in-force.
Final Additional Bonus may also be declared under the policy in the year when the policy
results into a claim either by death or maturity.. Final Additional Bonus shall not be payable
under paid-up policies.
25 Yrs. – Money Back Plan

Benefits:

A. Death benefit:
Death benefit payable in case of death of the Life Assured during the policy term provided the
policy is in-force shall be (i.e. all due premiums have been paid), “Sum Assured on Death”
along with vested Simple Reversionary Bonuses and Final Additional Bonus, if any. Where
“Sum Assured on Death” is defined as higher of 125% of the Basic Sum Assured or 7 times of
annualized premium. This death benefit shall not be less than 105% of the total premiums
paid up to the date of death. The premiums mentioned above exclude taxes, extra premium
and rider premium, if any.

B. Survival Benefits:

In case of Life Assured surviving to the end of the specified durations provided all due
premiums have been paid, 15% of the Basic Sum Assured shall be payable at the end of each
of 5th, 10th, 15th & 20th policy year.

C. Maturity Benefit:

On Life Assured surviving to the end of the policy term, provided the policy is in-force, “Sum
Assured on Maturity” along with vested Simple Reversionary Bonuses and Final Additional
Bonus, if any, shall be payable. Where “Sum Assured on Maturity” is equal to 40% of the Basic
Sum Assured.

D. Participation in Profits:

The policy shall participate in profits of the Corporation and shall be entitled to receive Simple
Reversionary Bonuses declared as per the experience of the Corporation, provided the policy
is in- force.
Final Additional Bonus may also be declared under the policy in the year when the policy
results into a claim either by death or maturity. Final Additional Bonus shall not be payable
under paid-up policies.