What is surrender value?
In case you choose to discontinue your traditional policy before the term ends, you get back some amount. This is the surrender value of the policy that is arrived at after deducting surrender charges. Unlike unit-linked insurance plans that have a cap on surrender charge, traditional insurance-cum-investment policies, including endowment and money-back plans, have no caps.
Most insurers offer two options: a minimum guaranteed surrender value, which is a regulatory requirement, and a non-guaranteed surrender value. The guaranteed surrender value is a fixed percentage of your premiums—typically, it is around 30-35% of all the premiums paid minus the first year’s premium. The non-guaranteed surrender value is arrived at more scientifically and indicates the value of your investments. In other words, the non-guaranteed surrender value is the current market value of the assets held against the policy. This value depends on various factors such as the sum assured, bonus, policy term and the number of premiums paid. Since the non-guaranteed surrender value is a better reflection of your investments, it is usually higher than the minimum guaranteed surrender value.
When do you get it?
Usually it is only after three years that a policy assumes a surrender value. Traditional insurance-cum-investment policies are typically front-loaded—a large chunk of the costs is deducted in the initial years. That’s why, most traditional policies don’t have a surrender value in the first three years. So if you surrender your policy initially, you may get nothing back.
What do you actually get?
Most insurers pay the minimum guaranteed surrender value, especially if the surrender happens early during the policy term. However, as you move towards maturity, you get the non-guaranteed surrender value.
What should you do
You need to ensure that your policy does not pay just the minimum guaranteed surrender value. You can find that out from the sales brochure of the plan. While most insurers reserve the right to pay the non-guaranteed surrender value, some insurers offer the higher of the guaranteed and non-guaranteed surrender value. Before you buy a traditional plan, go through the brochures carefully and ensure that the policy pays the non-guaranteed surrender value.