Term of the week: Surrender value

Surrender value is the amount the holder of a life insurance policy will get if he exits the policy pre-maturely. A policy acquires surrender value if the premium has been paid continuously for a minimum period of three years.

The sum paid to the policyholder will be the amount that has been allocated towards investment under the policy; the earnings on that investment less the ‘surrender charge’. Surrender charges vary from one insurer to another. IRDAI regulations do not allow insurers to charge for surrender after the first five years. So, on exiting the policy after five years, you will get your full investment value.

However, not all life policies will acquire surrender value. For instance, pure term insurance policies will not give any money if you discontinue the policy mid-way. But an endowment policy will fetch an amount proportionate to the premium paid.

Once the policy is surrendered, all benefits cease to exist. Surrender value of a policy assumes significance when you are looking out for a loan. Banks give loan of up to 80-90 per cent of the surrender value of the policy.

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