A couple of weeks ago, one of our clients was in a conversation with one of Ditto's IRDAI experts. The client had already decided to buy a term insurance policy of ₹2 crores. However, he told our advisor that he had a question about a specific jargon from the life insurance industry: “surrender value.”

Our client wanted to know -

  1. What is the surrender value in life insurance plans?
  2. Do term insurance plans have surrender value?
  3. What are the advantages and disadvantages of surrender value in life insurance policies?
  4. Should he purchase a life insurance product with a surrender value?

Being associated with an insurance awareness and literacy-first platform, our advisor spent the next 30 minutes explaining all the details regarding this jargon and clarifying all our client's doubts.

Two things happened after this: first, the client purchased one of the top term insurance plans for himself and another for his wife. Second, we realised that “surrender value in life insurance” is a rarely discussed term and needed a transparent discussion.

So, read on to find out what our experts think about surrender value!

P.S.: A Friendly reminder: It’s easy to get lost comparing policies and premiums. Instead of spending hours on it, why not get personalised insurance advice from Ditto? We offer free consultations with zero spam! Just 30 minutes to clarify all your doubts. Book a call now!

What is the surrender value in life insurance?

Say you opted for a life insurance policy when you were 25 and wanted the coverage to stay active until you turned 70. However, you had to discontinue the policy when you turned 40 due to unforeseen circumstances.

In such situations, the insurer will offer you a certain amount, which is also the cash component of your plan (value = up to the year you decide to discontinue the plan). This is called the surrender value in life insurance plans.

While discussing the surrender value in life insurance policies, you must know that not all life insurance plans offer surrender value as a feature/perk. Among the various types of life insurance, only -

  1. Endowment policies
  2. ULIPs

-offer surrender value as a feature.

Since both of these products have a savings component, they offer you the perk of surrender value in case you decide to discontinue the plan after a few years of your purchase. However, such a perk doesn’t come without some disclaimers. So, here is a quick look at some points to remember about the surrender value feature in life insurance policies -

Things to remember about the surrender value in life insurance

  1. The surrender value provision is only available after a pre-decided number of years from the policy purchase.

As per IRDAI regulations, a life insurance policyholder can opt to give up/surrender a policy only after completing 5 years into the policy (in the case of linked life insurance products). This 5-year span is also called the lock-in period.

2. The higher the premium, the higher the surrender value of the policy.

In the case of high premiums, the insurer looks at the insured’s profile as one with an equal share/skin in the game. Thus, when you surrender the policy, the insurer pays you a higher survival value if you pay a high premium towards your life insurance policy.

3. The later you opt for a surrender value in a life insurance policy tenure, the higher the surrender value.

The closer your surrender date is to your maturity years, the higher the surrender value.

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4. Surrender value in life insurance only stands validated in 2 cases -

a. In case you can’t afford to pay the premiums: Say you are in a financial crunch, wherein you don’t require a substantial amount to meet an emergency. Still, your monthly earnings can’t accommodate the premiums to be paid towards your life insurance plan. Under such circumstances, it’s best to opt for a surrender value against your policy. This will be a smart financial move since you will get at least some return from your plan in the form of a cash value.

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Had you opted for a term insurance policy and availed a Waiver of Premium Rider, such a financial crunch (if it was due to some terminal ailment, critical illness, or a disability resulting from an accident/illness) would have been met with a simple solution - no need to pay any more premiums towards your plan. Despite this, your coverage will remain active until your chosen maturity age.

b. In case you require sudden cash due to unforeseen emergencies: What if you have a sudden emergency requiring a lump sum and already have an existing loan (that won’t allow you to avail of another loan)? Rather than seeking help from your near and dear ones, a quick financial decision to bank on your surrender value against your life insurance policy might be a way out.

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Please remember that it is always recommended that you delay the surrender value option for your life insurance products as much as possible. The closer the surrender value is to the maturity age, the higher the surrender amount received will be. Accordingly, say you have opted for a ULIP or endowment policy. In that case, it is always best to venture into every other possibility before filing for the surrender amount because, with this one move, you become financially vulnerable for the future and lose out on a significant value that you could have enjoyed as maturity returns if you survived the policy tenure.

5. Surrender value is not available in the case of term life insurance plans: In most term insurance plans available, there are no “surrender value” features. However, some term insurance policies have a feature called Zero Cost Term plans for Smart Exit. Here is a quick look at the eligibility criteria and benefits offered under such perk, according to 3 of the most popular term insurance providers -

Best Term insurance providers Minimum tenure to be taken to avail of this benefit Minimum cover amount needed When can we exit? Exit Condition
MAX LIFE CASE A 40-44 years NA 25th-year only At 25 years or 65 years, which is earlier
CASE B 45 years and above 30th-year only At 30th years or 65 years, whichever is earlier
ICICI PRUDENTIAL For 18-34 years = Minimum till 65 years of age
For 35 years & above = Minimum 31 policy years		 60 lakhs 26th-year onwards 1) Anytime after completing 25 policy years but not in the last 5 years
2) Life-assured age should be a minimum of 60 years at the time of exiting
HDFC LIFE 36 years NA 31st- policy onwards Anytime after completing 30 policy years but not in the last 5 years

What are the types of surrender value in life insurance?

  1. Guaranteed Surrender Value (GSV)

If you decide to end your policy early, insurers guarantee a minimum payout, known as the GSV. This amount varies depending on multiple factors, like

  • how much you’ve paid in premiums,
  • how long you’ve held the policy,

-and other related conditions.

2. Special Surrender Value (SSV)

In addition to the GSV, insurers may offer an extra benefit called the SSV. This value considers any remaining benefits under the policy, including the reduced sum assured, future benefits, and any bonuses or accrued benefits. The SSV reflects how long the policy has been active and the premiums you’ve paid.

3. Immediate Surrender Option:

The SSV may be available after the first premium payment for single-premium policies and those with shorter premium payment terms.

Per the recent IRDAI regulations (effective October 1, 2024), insurers must display GSV and SSV amounts in benefit illustrations. Such illustrations must reflect how these values vary across the entire policy tenure.

So, if you need to cancel your policy, the surrender value will ensure that you receive a fair payout. The payout must be based on your financial commitment and premium payments.

However, the surrender value amount will vary based on your policy type and terms.

FAQs on Surrender Value in Life Insurance Plans

  1. FAQ 1: Do all life insurance plans offer surrender value?

No, not all life insurance plans offer surrender value. Only those with a savings component (Endowment policies and ULIPs) offer surrender value benefits.

2. FAQ 2: When should you opt for a surrender value on your life insurance plan?

There are only a few conditions under which it’s justified to opt for a surrender value against your life insurance plan -

  • In case you want to opt for a better life insurance plan.
  • If you require an emergency cash amount (and you aren’t eligible for a loan)
  • In case you are going through a severe financial crunch that renders it impossible to pay the premiums towards your life insurance plan.

3. FAQ 3: How is the surrender value in life insurance calculated?

Based on the type of surrender value, the calculations differ -

  1. GSV: This is a fixed minimum amount set by the insurer, often calculated as a percentage of the total premiums paid (excluding any first-year premiums or extra charges like riders). Typically, this percentage increases as you pay premiums over the years, but exact rates depend on the insurer’s policy terms.
  2. SSV: The SSV is generally higher than the GSV and is based on the policy’s accumulated value. It considers factors like - the paid-up value of the policy (proportionate sum assured based on premiums paid), accrued bonuses (if any), and duration of the policy and premiums paid.

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