What is surrender value ?
When a policyholder decides to discontinue the policy and terminate the policy contract, the insurer offers to pay cash value on the cancellation of the policy contract. This amount is called "surrender value". Section 113 of Insurance Act 1938, provides that if premiums have been paid for at least 3 consecutive years, the policy will acquire a guaranteed surrender value.
The minimum surrender value is 30% of total amount of premiums paid excluding the premiums paid for the first year and all extra premiums and/or additional premiums (extras charged by insurer for Health or Hazardous occupation and premiums paid for additional benefit). In addition, the surrender value of any existing bonus already attached to the policy is also paid. This surrender value is known as granted surrender value.
Sec.113 (2) provides that if a policy has acquired surrender value, it shall not lapse by non payment of further premium, but shall be kept alive to the extent of the paid up value acquired. The formula for paid up value is.
• No. of years premium paid
Paid up value = --------------------------------- x Sum assured
• Total No. of years premium payable
To this value, the already attached bonus is also added and total paid value is arrived at.
Surrender Value = Total paid up value x surrender value factor
Surrender value Factor is arrived by ready made separate chart, prepared by Actuarial Department.
The customer will be paid the guaranteed surrender value (sec.113) or the surrender value arrived, as per (sec.113 (2)) which ever is higher.
Eg: If the policy term is 20 years and 4 years premium is paid, sum assured 1,00,000, the paid up value = 4 x 1,00,000/20 = Rs.20,000 + Bonus accrued.
Surrender value = Paid up value x Surrender value factor
What is special surrender value ?
Special surrender value is more liberal (the amount is more) than the guaranteed surrender value. The surrender value factor depends upon the duration elapsed from the date of commencement of the policy and the policy term. As the duration elapsed increases, surrender value increases.
Surrender value = paid up value x surrender value factor.
