How to get rid of paying premium to your low paying Money back Policy?

November 5, 2011   ·   0 Comments

Are you tired of paying premium in your ? Do you think you have been tricked by agent while purchasing the policy & now you are struck as surrender value doesn’t pay anything before 3/5 years of policy? There are 2 options available. Either to surrender the policy or Making the policy paid up. Now the question arise which option to choose – Which is a better choice? Surrendering the Policy or making it paid up policy.

What is Paid Up Policy:

Paid up value/paid up policy – the surrender value is used to purchace an amount of coverage to where no further premiums are paid into it. thus, it becomes a paid up policy. The insurance company can calculate the paid up value that the policy’s value can purchase.

If payment of premium is discontinued before expiry of the term, the policy does not remain in force for the full sum assured, but acquires reduced value in terms of the contract. A paid-up policy loses all the additional benefits attached to the policy:

  • Double Accident benefits
  • Survival benefit installments in the case of money-back policies

How can paid up value for a policy be calculated?

Paid up value = Original sum assured * (Number of premiums paid / Total number of premiums that were required to be paid) + Any Bonus Amount (If any)

Important Point to Note for Paid up value:

  • Paid up Value is independent of Premium paid every year.
  • With this although the insurance cover continues, you would not be eligible for any future bonuses declared by the insurance company. However, you would retain any bonuses paid out before you made the policy “paid-up”.
  • You do not get any amount when you convert a policy to “paid up”. Instead, you get an amount equal to the paid up value (plus any bonuses accrued before you made the policy “paid-up”) at the time of maturity, or in case of your early demise.

Let’s have a small example to understand this in a practical scenario :

Let’s say you had bought a policy with sum assured of Rs. 10 Lakhs, tenure of 20 years, and premiums paid for 5 years.

The accrued bonus is Rs. 10,00,000/1,000*43*5= 2,15,000 (Considering LIC average value of Bonus/Year/1,000 Rs.)

If you make the policy paid up, the new sum assured would be:

= Rs. 10,00,000 * (5 / 20)

= Rs. 2,50,000 + 2,15,000

Thus, a cover of Rs. 2,50,000 would be available to you till the policy matures – that is, for another 15 years. At the end of 15 years, you would receive Rs. 2,50,000 + Rs. 2,15,000 =Rs. 4,65,000.

In case of untimely death of demise, nominee would receive Rs.4,65,000.

What is Surrendering a Life Insurance Policy

Surrendering a life insurance policy means you are completely cancelling your policy. You do not have to pay any premium amount to the insurance company after surrendering your policy. Once your premium stops, you do not get any life insurance cover offered by the insurance company in return to your policy premium.

When you decide to surrender your insurance policy, you get ‘surrender value’ of the policy in return. Insurance companies calculates this amount based on the number of premiums paid, the total number of premiums etc.. But to get the ‘surrender value’ you need to make premium payments for at least 3 years. If you cancel your policy before 3 years, you would not get any amount in return i.e you would forego all the premiums paid. Let’s have a small example to understand this in a practical scenario :

How to calculate Surrender value of Life insurance policy

Surrender Value = Surrender Value Factor * Paid Up Value

Surrender Value factor can be known from the Policy Quotation & vary from year to Year. On general basis, it is considered to be 85 % of your Paid up value.

Paid-Up Policies can further be surrendered if the policyholder wishes to take the money out. In that case, a certain surrender charge is deducted, depending on the tenure left for the policy to mature and the remaining amount can be paid out to the policyholder as Surrender Value. Even loans can be availed on Paid-Up Policies. If the loan amount is not paid back, then the Paid-Up Policy can be surrendered by the insurer to recover the loan amount.

Just to add up, Let us also see how to calculate Loan Value (Loan available from Insurance company on the Policy to the policy holder):

Loan Value = 90 % value of the Surrender value is the Loan Value of the policy

Loan Value = 0.9* Surrender Value

Verdict: There are N number of reasons because of which people do not want to continue paying premium for their running insurance policy and wish to terminate the same. But how to get the best out of it is something that needs to understand before taking such a decision.

For a person who feels struck in the money back policy & doesn’t want to continue should opt for making the policy paid up rather than surrendering the policy. It only makes sense to surrender the policy if one needs immediate cash because of some unforeseen circumstances.

Rajesh Singla

Rajesh is the founder & CEO of Stockssavvy, Stocks analyst,financial advisor by choice,software engineer by fate,biker,gamer,cricket lover n enthusiastic person. He believes in doing things not just to get by but to get Ahead...

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