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Pradeep Gaur/Mint
Pradeep Gaur/Mint

Differences between guaranteed and special surrender values

Insurers may sweeten the deal if you exit early by giving you a special surrender value, which is higher than a guaranteed surrender value

If you own a traditional bundled insurance policy, you need to know that these plans come with heavy penalties if you decide to leave midway. Surrender charges in traditional bundled plans are steep.

But insurers may sweeten the deal on early exit by giving you a special surrender value, which is higher than a guaranteed surrender value. Is it high enough to not hurt?  

In traditional plans, rules mandate that the policy acquire a surrender value and that should be paid to the policyholder if she leaves it midway. So a bundled plan acquires a surrender value after 2-3 annual premiums are paid. For instance, if the premium payment term is at least 10 years, the policy acquires a surrender value after three annual premiums are paid.

If you surrender before that, you don’t get anything. So, a surrender before three premiums are paid means a penalty of 100%. 

If you surrender after 3 years, the insurer has to pay at least 30% of total premiums. So, the cost of surrender is a maximum of 70% of your money. If the premium paying term is less than 10 years, the policy acquires surrender value after two annual premium instalments.

So the minimum guaranteed surrender value of 30% of the total premium paid accrues after the second year. 

Between the fourth and the seventh year, under both the cases, it’s 50% of the premium paid. After the seventh year, the insurer has to file a surrender charge and get it cleared by the regulator.

The regulations also mandate that surrender value of any bonuses accrued or guaranteed additions be added as well. This needs to filed and approved by the regulator at the time of getting the product approved.

While the guaranteed surrender value is spelt out, the regulations provide for a special surrender value as well. This surrender value reflects the value of investments and depends on various factors such as sum assured, bonuses, policy term and premiums paid.

Since the non-guaranteed surrender value is a better reflection of investments, it’s usually higher than the minimum guaranteed surrender value, but charges remain hefty. 

In the initial years, the special surrender value is only marginally better. But as you move towards maturity, the gap increases. So make sure you know what you are buying, compare with other financial products for costs and returns. Take the help of a planner to understand the insurance policy and the surrender penalty clause.

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