Surrender v/s Paid-up – which is better option for your old insurance policies?

POSTED BY Anuradha Singh ON January 22, 2020 COMMENTS (51)

Do you want to get rid of your old money back insurance plans, but are confused if you should “surrender” or make it “paid up”?

Today I will explain which one is the best option amongst the two.

Surrender vs Paid-up option in Insurance policies

All those assured insurance plans which your parents made you buy from your friendly neighbourhood uncle is nothing less than a high premium low return policies with not more than 1-5% CAGR return.

These policies don’t provide enough life insurance cover neither they create enough wealth for you for your long term goals like children education, child marriage or retirement and on top of that, these policies have pathetic returns value if you want to close them before maturity and take back your money.

Mainly there are two ways to discontinue these insurance policies which are –

  1. Paid-up Policy
  2. Surrender Policy

What is “paid up” option?

Under this option, if a policy holder does not close the policy, but stops paying any further premium. However, note that this option is generally applicable only after one has paid for at least 3 yrs. (however, check your policy wordings for exact years)

The amount which you will receive at maturity will be reduced, in proportion to the premiums paid. This sum assured is called the paid up value. It is calculated using the following formula:

Paid up value = Original sum assured x (No. of premiums paid / No. of premiums payable)

Example – A traditional insurance policy with sum assured of Rs. 10 Lakhs for 20 years with a premium of Rs. 30,000 p.a. paid for 8 years. Let’s find out what will be its paid up value if one wants to stop paying further premiums.

Paid up value = 10,00,000 * 8/20 = 4,00,000

At a high level, the numbers don’t look back. You will get 4 lacs, but you paid just 2.8 lacs overall, however, remember that you will get this 4 lacs after so many years and you will lose the purchasing power because of inflation.

You can simply say that real worth of Rs. 4 lac received after 12 years is Rs. 1,58,000 today, taking inflation at 8%.

Therefore, if you are choosing policy paid up option, keep in mind that converting the policy into a paid-up policy will lock your money for the remaining term of the policy and also, actual worth of the amount, which you will receive in later years will be very less if the maturity of the policy is very far from now.

What is “surrender policy” option?

Under this option, you close the policy completely and take back your money. The money you get will be some percentage of your premiums paid minus the first year premium. And this percentage increases depending on how many years the policy premium has been paid.

A policy generally acquires any surrender value only after 3 yrs of premium payment, which means that if you choose to surrender your insurance policy before 3 yrs, you lose all your money and don’t get back anything.

Note that the surrender value starts with 30% and goes up depending on the number of years you have paid the premium.

Following is an indicative table which shows the surrender value as a percentage of premiums paid

Time of Surrender % of premium paid – first year premium
After 3 years 30% of premium paid
After 5 years up to 8 years 50% of premium paid
After 8 years 65% of premium paid
Last 2 years to policy maturity 90% of premium paid

This percentage can change from company to company and depends on factors such as the type of policy. Every policy brochure mentions details about surrender value but, it is not compulsory that all the companies mention this percentage which is also called the surrender value factor in their brochures.

Example of surrender policy

Mr Pratik has bought a traditional insurance plan of 20 years with a sum assured of 6 Lakhs premium amount is Rs. 20,000 per year. After paying the premium of 6 years, he wants to surrender the policy.

Surrender Value = 50% of (premium paid – first year premium)

= 50% of (120000 – 20000)

= 50% of 1,00,000

= Rs. 50,000

You can see that he will just get Rs 40,000 from surrendering the policy even if he paid Rs 1,20,000

flow chart for surrender vs paid up insurance policy

 

When to choose “Surrender” and “Paid up” option?

Surrendering a policy is suggested when

  • You are not able to pay the premiums
  • You need money for some reason
  • When remaining number of years in policy is more than 8-10 yrs

This option is suggested because you still have many years left and you can pay the same premium amount in a better product which will do wealth creation for you.

Making a policy paid up is suggested when

  • You don’t need money but don’t want to pay further premiums
  • When you don’t want to pay premiums, but still want the policy to run
  • When your policy maturity is very near (2-4 yrs)

Making a policy paid up is generally not suggested, but a lot of times, investors are not able to take the pain of getting the reduced amount from their policy and feel like “they will get something in future”, however considering “time value of money“, it’s not a great option.

How to deal with the emotional part “I am facing so much loss”?

In both the options, there will be a loss for sure. Money back insurance plans are designed to give low yields and penalize you if you quit in between.

I think dealing with closure of insurance policies is more of a psychological battle You know you have got a wrong product and its bad for your future, but people can’t deal with the fact that they are facing so much of loss – “I paid 8 lacs, and I will get back only 4 lacs, I will lose 4 lacs”

Note that if you consider TIME VALUE, things will be easier to decide.

If your friend borrows Rs 100 from you and returns you Rs 110 after 10 yrs, you are not in profit, you are actually in LOSS. Because you could have created Rs 250 with an alternate investment and now you just have Rs 110, that’s Rs 140 loss.

Just looking at it from absolute numbers point does not make sense.

For example, imagine a sum assured of Rs 10 lacs with a yearly premium of approx. Rs 53000 per year. Now if a person has already paid 5 premiums and wants to surrender the policy, they will just get back around Rs 85000 (assuming 40% of 4 premiums, as one premium is deducted). The immediate loss of mind is for Rs 1.8 lacs (paid 2.65 lacs and getting back 85,000)

This is a tough situation for the mind and very tough to handle. A person feels why to take a loss when one is not recovering the amount paid also and just continues the policy till the end. The person will get back anything between 15-18 lacs, depending on the bonus amount declared.

This translates to only 5.69% and this the best case (it will get better if you die early after taking the policy, but I am sure you would not like it)

Now if the same person reinvests the same 85,000 along with Rs 53,000 premiums yearly into some equity-based products like equity mutual funds or index funds, even if assume a modest 12% returns which have happened in past, the wealth one will have will be 24.5 lacs and the IRR will be approx. 7.4% of the whole scenario. This second option also gives you better liquidity and exit option whenever you wish to get money.

51 replies on this article “Surrender v/s Paid-up – which is better option for your old insurance policies?”

  1. Tushar Bodake says:

    Thanks for sharing details.
    Really dont understand this LIC rules as there is nothing for investor considering all cases(for long term investment) including “Paid Up”, “surrendering policy” OR Paying all premiums.
    Why all products are still available in market for sale? 🙂

    1. Jagoinvestor says:

      That’s the point.. Penalize investors if they do not continue till end.. that’s the plan !

  2. shivprakash yadav says:

    I have a Monthly income plan from Max life and now I am going to pay the third yearly premium of 76000I am thinking of surrender after the third premium and get some money back but loss or should I continue it as it will give some monthly income after 15 years .. what will you suggest

    1. Jagoinvestor says:

      These are different than those regular traditional plans.. I suggest you go through their workings and how they work and If they are giving you decent returns or not. If not, then you can think of surrendering them

      Manish

  3. Deena says:

    How about the accrued bonus of the policy? Will it be paid at the end of the tenure incase of paid up?

  4. Sumeet Sali says:

    Bingo!!!
    Coincidentally, yesterday I was thinking of doing away with my traditional policies (unfortunately plural). But was wondering about the pros and cons.

    And here I get an answer to my queries.
    Thank you very much. Indeed the picture is now clear in my mind.

    Thanks once again.

    1. Jagoinvestor says:

      Great to hear that Sumeet ! ..

  5. KJ Singh says:

    Reliance- Nippon Insursnce agent sold a policy of Rs 8 lacs to me stating that it is Is one time payment policy ,it will
    earn 8%,9%,10% interest during first,second, third year. After three years full money with interest wii be paid back.However he forwarded a conventional policy .This policy states that payment term is 10 years Rs 8 lacs per years and policy matures after 12 years. On my contacting him he sent me a letter stating that it is payable after one year. The letter bears no signatures however it bears the insurance company registration number. Please advise.I am a Defence pensioner with 36 years service. I seek your advice and help so that my savings are not cheated.

    1. Jagoinvestor says:

      You have been missold.. its a yearly policy sold as one time premium ..

      Kindly return back the policy stating free lookup notice

      Manish

  6. Rajay says:

    Very good write-up. Key is person should have term insurance to cover insurance needs and equity investments to cover investment needs. Your write-up is surely very well written.

  7. Nitesh Desai says:

    Spot on ! I was in the dillema between paid up and surrender options. You explained them very clearly. Thank a lot for such a useful article.

  8. Karthik says:

    Thanks for this article,

    I’ve LIC Health Plus taken for Rs 6,000/- yearly premium till the age of 65 yrs for the assured amount of 2 Lakhs.
    I’ve have been paying this premium for the last 11 years.

    I will be surrendering this policy very soon, going by the formula you provided i might get around 39,000/-, right ??

    Does this article implies to Term insurance also ?

    Regards

    1. Jagoinvestor says:

      Karthik

      THis article is only for traditional insurance plans, not term plan .. better talk to LIC on how much is the surrender value to arrive at the exact amount !

      Manish

      1. Karthik says:

        Ok, Thanks but what about my LIC Health Plus which is not a term plan

        1. Jagoinvestor says:

          Atleast do the analysis in the same way I shown here

  9. Sam says:

    Hello there,

    I’ve a LIC policy with qtrly premium payment of almost 2k..its a money back policy and 4yrs remaining out of 20yrs.
    Let me know what you think is a best option.. As per docs ill get a lac & 50k bonus end of 20yrs..is it worth waiting

    1. Jagoinvestor says:

      I think just make it paid up !

  10. Amitabh Sethi says:

    In the conclusion that you shared, won’t it be better if the person gets the policy paid up as it would still provide the insurance cover till the policy matures while they can invest the future premiums in alternative asset class like equity or debt depending on their risk profile. In your conclusion it appears that the person does not need the money immediately, so its better not to surrender the policy and loose what has been paid as premiums in the past. Your views please.

    1. Jagoinvestor says:

      “it would still provide insurance” .. But how much? You will be better off buying a term plan ..

      Manish

  11. HANNNING says:

    Beautiful article. If we use Paid option does we get Rider benefits (Accidental or Disability) after we select paid up option.

    1. Jagoinvestor says:

      May be , but in pro rata mode !

  12. Amir says:

    Nice post. Thanks for sharing this post.

  13. Prem says:

    I have a endowment plan which is 8 years old where I’m paying 4000 per month and still have 15 years left for the maturity . I understood the returns are poor and closing the policy now will incur loss to me. After 10th year of the policy, company will declare bonus to the policy. My doubt is, is it wise decision to hold the policy for 2 or 3 more years (to be 10+ years) to get some bonus added. So that at least the amount paid will be recovered? Or closing the policy now and invest the money in NPS or something like that sort?

    1. Jagoinvestor says:

      Prem , that’s what is mentioned in the article. You may wait for 2-3 yrs more , but is the wait worth? What is the point of paying another 2/3X money to get back X bonus? Its like buying Rs 100 note with Rs 300!

      Do your evaluation, but I think its best to just surrender and move on .. I know its easier said than done !

    2. Kurien Mathew says:

      Here I see that Jago invester is not considering the bonus accrued on the surrendered policy. Eg.LIC of India, gives you a better surrender value which includes the bonus accumulated in the policy which has been surrendered say after 8 to 10years. Ofcourse surrendering a policy is loss.

      1. Jagoinvestor says:

        Even if you include it the conclusion will remain the same .. you can take a real life case and do the calculation

  14. Sandeep says:

    “it will get better if you die early after taking the policy, but I am sure you would not like it” 😂 👌

    1. Jagoinvestor says:

      Haha .. some times one has to say things like that !

  15. Ashok KE says:

    1. Article is very informative.
    2. Is it applicable on Postal Life Insurance also ?
    3. Please explain the difference between Guaranteed Surrender Value and Special Surrender Value.

    1. Jagoinvestor says:

      Ashok

      Thanks, yes its applicable to most of the traditional life insurance policies
      Read this to know difference between guaranteed and special surrender value : https://www.livemint.com/Money/RJey3WFC8D2tOHXigHJA6K/Differences-between-guaranteed-and-special-surrender-values.html

  16. Ramanan says:

    The objective of an insurance product is different fron that of an ewuity-based product, as yiu are aware. But the suggestiin in your last para to reinvest 85k (with annual amount of 53k) in equity products not only goes against the insurance objective but increases the investnent risk. The investor loses the life cover in the alternative option suggested by you.

    1. Jagoinvestor says:

      The old style endowment plans and money back plans are FOR INVESTMENTS … Its just sugar coated with a thin layer of life insurance.

      So, yes you are right that the person looses the life insurance, but HOW MUCH ? Its anyways not enough for family.

      For that one has to take a term plan with a good enough cover.

      Manish

  17. Niranjan says:

    Thanks for the valuable advise which is an eye opener. Hope, maximum investors like me are not aware of the actual facts. It is only profitable if the policy holder die early after paying 2/3 instalments. Regards

      1. Abhijit Ganguly says:

        Life insurance is not stock market. It is valuable when the earning member of the family, in general, takes it in the name of his/her spouse

        1. Jagoinvestor says:

          Yes, but those traditional life insurance does not offer enough life insurance, they are just thin coating of insurance!

  18. NEILO KOZA says:

    I will Surrender,I take back my money.

  19. Goipnath says:

    Hi Anuradha,
    The article is worth reading. Please let me know what will happen if I took a loan from the policy and left unpaid both the premium and the loan interest.

    1. Jagoinvestor says:

      I did not get it.. you mean you will default on the loan?

  20. VT says:

    This is such a great and simple explanation of the situation. Happy to have found this because I am facing such a case.

  21. Sanjay Prabhu says:

    If policies have been paid up can they be surrendered at a later date

    1. Jagoinvestor says:

      Thanks for sharing that!

      1. Rajay says:

        Hello Jagoinvestor, You have not replied to Sanjay Prabhu’s query. I am facing a similar situation.

    2. Jagoinvestor says:

      Actually I am not sure about it .. but I think it should be possible. Because to surrender a policy a policy must be having some PAID UP value. and that happens after 3 yrs of policy premiums payments

      Manish

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