Surrender value the amount the policyholder will get from the life insurance company if he decides to exit the policy before maturity. The surrender value of a life insurance policy is the amount of money you receive if you decide that you no longer wish to continue with the policy. It is the amount the policyholder will get from the life insurance company if he decides to exit the policy before maturity.
The policyholder can get the surrender values in any of the following forms:
(i) Cash Surrender Value: The policyholder can get the value of surrender in cash. When the policyholder gets the cash, the contract comes to an end and the insurer has no further obligation to pay on that particular policy. Since all the amounts surrendered is given at the time of surrender, the cash benefit is generally less than the other benefits. However, the cash surrender value gives immediate relief to the policyholders; so it is generally preferred by them.
(ii) Reduced Paid-up Insurance: In this case, the surrender value is not paid immediately, but the original amount of policy is reduced in a certain proportion and the reduced amount is mid according to the term of Policy.
Thus, if, after at least two full years premiums have been paid in respect of the policy, any subsequent premium be not duly paid, the policy shall not be wholly void, but the sum assured by it shall be reduced to such a sum as shall bear the same ratio to the full sum assured as the number of premiums actually paid shall bear to the total number, premiums payable as originally stipulated for in the policy provided such reduced sum together any attached bonus in the case of a policy for a sum assured of (Money amount as country law) or over be not less than (Money amount as country law) and in the case of a policy for or a sum assured of less than (Money amount as country law) be not less than (Money amount as country law).
- If the premiums under the policies have been paid for a period of five years or 1/4 of the original premium paying period of the policy whichever is less but subject to the condition that minimum 3 years premiums are paid.
- The paid up value under the policy is not less than (Money amount as country law) excluding of attached bonuses for policies where under original sum assured is (Money amount as country law) or more and (Money amount as country law) exclusive of attached bonus where the original sum assured is less than (Money amount as country law).
(iii) Extended Term insurance: The net cash value arisen at the time of surrender of a policy can be used for payment of a single premium for the purchase of term insurance, where the sum assured will be paid only when a death of the life assured occurs within the term of the policy. The main disadvantage of this scheme is that if the life assured does not die within the specified time, the premium paid is forfeited by the insurer. Thus, the surrender value would be lost with no use to the insured. However, in case of death during the form, the policy-holder would be benefited for a higher amount with only a small sum of surrender value. Moreover, the term insurance under this scheme is given without medical examination.
(iv) Automatic Premium Loan: Under this scheme, the surrender value is used for payment of future premium. Thus, the policy will continue up to the period the surrender value is adequate enough to meet the number of further premiums, each premium is paid automatically as it comes due by the creation of a loan which with interest becomes a lien upon the face of the policy amount until paid.
The advantage of this scheme is that if the policyholder dies after surrender but before expiry or the surrender value, full policy amount minus the loan and interest thereon is paid. The policy does not lapse but remains in full three subject to the lien.
(v) Purchase of Annuity: The policyholder, with the surrender value, can purchase an annuity. Thus instead of taking surrender value in cash, the annuity is purchased from the available surrender value. The amount of annuity depends upon the amount of net cash value, the attained age of the policyholders and the type of annuity required. The option of an annuity is a better alternative to those who require using all their savings during their lifetimes.
