The problem with a traditional insurance policy that also doubles up as an investment product is not only the low returns it usually offers and its opaque structure, but also the residual value of your investment should you decide to quit in the middle of the policy term. In insurance parlance, what you get back after you decide to terminate your policy midway is called the surrender value.
How does it work?
In case of regular premium policies, even as these plans don’t spell out the charges in the policy, a typical traditional plan is front loaded—a large chunk of the costs are deducted in the initial years. So in the first three years most traditional policies don’t have a surrender value. Brochures of these policies will carry information on when the policy acquires a surrender value. Most brochures will indicate that the policy will acquire a surrender value only after three years provided all the premiums due have been paid. So if you have not paid premiums in the first three years, you are unlikely to get any surrender value.
In case of single premium policies, the surrender value is accrued immediately but you get it only after three years.
When do you get it?
After three years traditional policies acquire surrender value. However, the amount of surrender value will differ across insurance companies. A guaranteed surrender value—which is also a regulatory requirement—is what all the insurers will pay. This is usually equal to 30-35% of all the premiums paid minus the first year’s premium. Insurers also offer a special surrender value or a non-guaranteed surrender value. While guaranteed surrender value is a fixed percentage of your premium, special surrender value is arrived at more scientifically and it indicates the current market value of the assets held against the policy. The special surrender value depends upon the sum assured, bonus, policy term and the number of premiums paid and is higher than the minimum guaranteed surrender value.
What should you do?
Whether you get just the guaranteed minimum surrender value or the special surrender value will depend on what the insurer chooses to pay. Some will offer only the guaranteed surrender value, some will offer higher of the two and some will keep the right to offer the special surrender value. What you get back as surrender value is also mentioned in the policy brochures. Ensure you have a policy that gives the non-guaranteed surrender value.