Endowment policies are quite complex to understand. In most cases, you are advised to take up a policy that does not tick off every part in your check-list and which in turn ends being a loss you realize later on or you find and settle for a great LIC policy that benefits you in more than one way.
Let us take an example. Let us say you buy a wrong policy and you want to scrape if from your portfolio. If you have invested in the LIC policy for a period of three years or more, you are entitled to an amount (called surrender value) payable by the company you got the policy from. However, if you don’t know what amount you are entitled to, companies will try and scam you. In this article, you will understand the types of surrender values and how to calculate it.
Note: Surrender value is always paid basis on the years you have invested in the policy and the bonus and premium received.
In a nutshell, surrender value is nothing but a value or an amount payable to you if you decide to discontinue your LIC policy. This value is payable only to you after your premium of three years has been paid to LIC. It is just like a bonus for participating in the policy. However, experts don’t advise seeking for the surrender value as it is proportionately lower than what you’ve invested or paid.
Types of Surrender Values
There are generally two kinds of surrender values; Guaranteed Surrender Value and Special Surrender Value.
- Guaranteed Surrender Value: Once you have completed three years of paying for your premium, you are entitled to at least 30 percent of your basic premium. However, your first year’s premium and accidental death benefits are excluded.
- Calculating your guaranteed surrender value
- If you pay INR 25,000 annually, meaning INR 75,000 for three years, you’ll receive only INR 15,000 as the first year’s premium is excluded.
- Two years amount = 50,000
- Guaranteed Surrender value = 30/100 x 50,000 = 15,000
- Cash/ Special Surrender Value: Before understanding special surrender value, it is important to understand what paid-up value means.
- If you discontinue paying your premium after a particular time period, your policy will still continue but the sum assured will be lower. This reduced assured sum is called paid-up value.
- Paid-up value = Original sum assured x ratio of the number of premiums paid to the no. of premiums paid.
For Example:Let us say the sum assured is 5 lakh rupees for a time period of 5 years and you pay your premium quarterly of INR 25,000.
Using the formula we will get 500,000 x 12/80 = 75,000
Total amount: 500,000
Ratio Premium paid in this time: 12
No. of premiums paid: 80
In this example, the numbers of premiums to be paid are 80. i.e. 4x 20
The numbers of premiums you have paid are 12 i.e. 3x 4
The amount you are to be paid is INR 75,000 based on the formula. This is the sum you or your nominee will receive at maturity. Paid-up or cash value and the bonus is the total paid-up or cash value you will receive.Note: Different policy companies use different methods to arrive at the surrender value. In most cases the calculation factors like policy type completed policy years, and time to maturity are taken into consideration. Sometimes the profit fund performance is also taken into consideration.
Benefits of LIC Surrender Value Policies
- Maturity Benefit: The benefit with maturity is you are assured your maturity amount along with loyalties in the lump sum.
- Death Benefit: This is one of the best benefits of this policy as you are granted 250 times of your monthly premium along with loyalties. However, the first year’s premium is excluded from this but paid in lump sum.
- Additional benefits: Additional benefits are optional which you can add to your basic plan. This requires an extra premium to be paid to avail these benefits.
- Surrender Value: Investment of any sort is a tricky game. Buying life insurance requires one to have capital and long-term commitment. However, with the help of surrender value, you can claim your termination at any point in time if you are not happy with your current plan. You are also entitled to partial surrenders.
- Guaranteed Surrender Value: If you wish to cancel your policy after a time period of three years you are entitled to surrender. You are permitted up to thirty percent of the total amount invested in premiums excluding the first year.
- Special Surrender Value: You can claim up to 80% of Maturity on the Sum Assured if you have paid premiums for 3 years but less than 4 years.
- If you have invested for four years but less than 5 years then you are entitled to 90 percent of the maturity sum assured.
- If you have invested in your premium for more than 5 years you are permitted to avail 100% of the Maturity Sum Assured.
Corporation Policy on Surrenders
In general, you will be paid a Special Surrender Value by your corporation which is in most cases more than the Guaranteed Surrender Value. The value of this, however, will be dependent on the period for which premiums have been paid and also the policy period at the date of surrender. In various situations, when there is an early termination of the policy, the surrender value which is payable may be less than the total premium paid for.
In conclusion, it is best to invest in LIC policies but finding one that meets your needs is crucial. You should opt for Surrender Values that seem fit even at maturity.
Experts reckon calculating surrender values at the time of investment to see what returns you can yield. It is best to choose an LIC policy based on your requirement. Do refer to the surrender value formula to calculate your maturity.