Guaranteed and Special Surrender Values in Insurance

If you have a traditional life insurance policy, then detaching yourself midway or before policy maturity can attract a heavy penalty.  If you have a bundled plan, then you can expect even steeper surrender charges. However, your insurance provider may offer a special surrender value which is higher than the guaranteed value.

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Surrender Value

If you decide to terminate an insurance policy before maturity, then the amount disbursed to you by the insurer is called the surrender value. It’s usually the sum of your savings (put under the policy) and the earnings on them. However, a surrender charge is deducted from this amount before you get the final amount.

Note: If you terminate your insurance policy after 5 years, then as per regulating authority IRDAI your insurer is not allowed to deduct any surrender charges. So, you will get the full amount that’s due.

Surrender Value Types

Surrender value can be of two types:

1. Guaranteed Surrender Value

The guaranteed surrender value is a fixed value that’s also mentioned in your insurance brochure that you check at the time of investment. It’s usually around 30% to 35% of the total value of the premiums paid by you minus the first year’s premium. It also may not contain any bonuses or perks that you received from your insurer.

2. Special Surrender Value

Special surrender value can often be slightly higher than the guaranteed surrender value but is dependent on the insurer’s discretion.

A standard formula for the special surrender value is as follows:

Special surrender value = (Original sum assured X (No. of premiums paid/No. of premiums payable) + total bonus received) X surrender value factor

In this, the surrender value factor is zero for the first three years of the policy. After this period, it starts increasing. Thus, the longer you stick with your insurance policy the higher value you are likely to get.