Awareness precedes success
Most of the Insurance Policy Holders are unaware of the concept of Surrender Value and Paid Up Value in case of lapse of a policy for any reason. This note with an example will help understand the concept.
Guaranteed Surrender Value
Under Sec 113 of Insurance Act 1938 if a person discontinues a policy, the insurer will not be allowed to forfeit all premiums paid. In every premium there will be an element of savings element accruing in a reserve fund. Insurance Act 1938 stipulates that the insurer should pay a guaranteed surrender value, if the premiums are paid for a minimum period of 3 years. Some Insurers pay more than the amount stipulated by the Act and this is called Special Surrender values.
Paid Up Value
When policy lapses after 3 years the Insurer will reduce the sum assured to a sum in the same ratio as the number of years premiums paid, bearers to total number of years in term of the policy.
If Mr X. had taken a policy for 32 years for 10 Lakhs and he has paid the premium for 8 years only, then he would have paid for the term only. The Insurer offers to pay the Sum Assured, due payable on the maturity date or death if earlier as Paid up value that is Rs. 2,50,000.
Reduced Sum Assured (RSA is the Reduced Sum Assured or the Paid up value) =
(Total number of years premium paid X sum assured) / (Total term of the policy)
Policies are with Profits or Participating polices wherein the policy holder will be eligible to get share of surplus of insurer called the bonus.
No bonuses will be added to the sum assured of policies without profits or non – participating policies.
In case of policies wherein bonus eligibility is available, the sum total of Reduced Sum Assured + bonus allocated, shall be the Paid up Value.
Where there is no bonus eligibility for the policy, the Reduced Sum Assured shall be the paid up value.
Premiums are paid in advance in Insurance transaction. So the policy will be in force for the term depending on the mode of payment. Obviously, a monthly mode will keep the policy alive for 1 month, in quarterly it will be for 3 months, Half yearly for 6 months and yearly for 1 year.
Mr. X had taken a Half yearly mode of payment for 10 Lakhs with profits for 32 years term. The policy had commenced on 28th March 2002. He paid the premiums due on 28th September 2009. Due to certain financial constraints he could not pay further. Upon lapse of his policy due to non payment of premiums, not all of the money paid is lost.
Reduced Sum Assured = Rs 2,50,000
Add Bonus Accrued = say 1,60,000
Total Paid Up = Rs 4,10,000
How much Life insurance is another article which you will find useful….