August 30 , 2013
If you are contemplating returning your endowment or ULIP policy this article will aid your decision of whether surrendering policy is the best thing to do now based on calculation of surrender value of LIC policy. The same calculation generally applies to policies from any life insurance company.
Value of insurance policy on surrender
An endowment policy on surrendering fetches some value after 3 premium payment years. It is higher of Guaranteed Surrender Value (GSV) and Special Surrender Value (SSV). Guaranteed surrender value is fixed whereas Special Surrender Value varies. They are detailed in sections below.
Surrender value of ULIPs depends on the fund value. The fund value is market-linked. ULIPs have 5 year lock-in period so usually if surrendered after 5 years you would be paid fund value. If discontinued within 5 years then fund value minus discontinuance charge will be kept in a Discontinued Policy Fund where it will earn minimum interest (~ 3.5-4%). This will be paid out after completion of 5 years.
Calculate guaranteed surrender value of your LIC policy
Guaranteed Surrender Value is 30% of basic premiums excluding first year's premiums. Note that it is basic premiums; additional premiums you might have paid don't count here. For illustration if you paid Rs 20,000 annual premiums for 6 years on a 20 year policy of sum assured Rs 5 lakhs the guaranteed surrender value would be Rs 30,000. Painfully less, agreed, but mostly you get special surrender value which could be higher than this.
Calculate paid-up value and special surrender value of your insurance policy
Special surrender value is a discounted factor of paid-up value of your policy. Paid-up value is a simple concept.
After paying premiums for a certain time if you stop paying further premiums your policy acquires what they call as paid-up value. This is what the policy will pay on death of policyholder or else on maturity. It is calculated in this manner
Paid-up value = (No of premiums paid/Total no of premiums payable)* Sum assured
So in the above illustration paid-up value would be (6/20)*5,00,000 = Rs 1,50,000.
In many policies accrued bonuses are also included in paid-up value if certain number of premium payment years are completed. Find this out yourself.
Now surrender value factor or discounting factor varies among insurance companies and depends on factors like fund performance policy type, premiums paid and years for maturity. This might not be disclosed in the brochure or website though it is an IRDA stipulation but you can easily find it out from an agent or by calling up on the company helpline. Bonus sheet would also be found on the website or you can find by making a call.
Special surrender value or cash surrender value is a discounted multiple of paid-up value and bonus accrued till date. It is calculated as
Surrender value = (Paid-up value + bonus)* surrender value factor
If we assume total bonus of Rs 1.26 lakhs at 4.2% and surrender value factor of 35% in the 6th year for a 20 year endowment policy you would arrive at surrender value of Rs 96,600 = (1,50,000 + 1,26,000)*35%.
Dial up LIC helpline to know surrender value
Most of the times, LIC staff are co-operative in dealing with customer queries. You can approach them via email or the helpline number and simply find out surrender value of your policy. But it is good to be sure it is calculated as per their formula some of you might want to look up bonuses on the website or ask on the helpline. Then you can calculate surrender value for yourself.
Finally the big question- whether to surrender policy now?
In the early policy years surrender value of endowment policies would be less than premiums paid. So you have to take a call on whether to get out of it with whatever you get and invest it in mutual funds or elsewhere (even FDs would pay better than most endowment policies!).
If much time has elapsed since you bought the policy then it might be better to make it a paid-up policy. Paid-up policy means you just stop paying premiums without surrendering and get paid-up value on death or at maturity.
Don't forget that tax benefits you might have claimed under section 80 C will be reversed if policy is surrender within 5 years. In the year you surrender policy total tax rebates claimed so far is to be added to your income and tax is to be paid on it.
Consider all these before taking action or consult a financial adviser.