How To Calculate Surrender Value Of Endowment Policy?

By their very nature, endowment policies are difficult to comprehend. It's not easy to figure out how much money you'll get if you get the wrong insurance and want to get rid of it from your portfolio. Let's have a look at how to do it.

If you quit paying premiums before the end of the policy term, you are entitled to a payout based on the number of years you have paid, the premium you paid, and the bonus you earned.

Guaranteed surrender value and special/cash surrender value are the two forms of surrender value. While the guaranteed value is straightforward to compute and may be found in the product brochure and policy bond, the special surrender value is determined only after the policyholder submits a surrender request.

How To Calculate Surrender Value For Endowment Policy?

Below are methods on how to calculate surrender value for endowment policy:

1. Guaranteed Surrender Value

If you have paid premiums for at least three years, you are eligible for this. It is equal to 30% of the basic premiums paid, minus the first-year premium. Riders with additional premiums, such as accidental death benefits, are not included.

If you pay Rs 75,000 in the first three years (Rs 25,000 yearly for a sum assured of Rs 5,00,000), the minimum you'll earn is 30% of Rs 50,000 (total premium paid minus first-year premium), or Rs 15,000.

This does not include any insurance bonuses you may have received. If your insurance pays a bonus that you earn for the policy's term, the special surrender value is the amount you'll get when you close it early (surrender).

2. Special Or Cash Surrender Value

Before we can appreciate the special surrender value, we must first comprehend the paid-up value. If you don't pay your premiums for a certain length of time, your insurance will continue, but with a smaller sum assured. The term "paid-up value" or "paid-up sum assured" refers to the decreased sum insured.

The original sum assured is multiplied by the ratio of the number of premiums paid to the number of premiums payable to arrive at the paid-up value.

Let's Understand this with An Example

Consider the following scenario: You pay a Rs 25,000 yearly premium quarterly, and the sum assured is Rs 5 lakh for a 20-year policy term. The paid-up value will be Rs 5,00,000X(12/80) if you cease paying after three years, i.e. after you have paid 12 premiums.

We had estimated the paid-up amount to be Rs 75,000. The exceptional surrender value = 27.76 per cent (Rs 75,000+Rs 60,000) = Rs 34,476 in the third year, anticipating a bonus of Rs 60,000 and a surrender value factor of 27.76 per cent. 

In this scenario, the amount of premiums you were expected to pay is 80 (20X4), however, the number of premiums you paid is 12 (3X4).

Rs 75,000 is the paid-up value. This is the amount you will receive when you reach retirement age or when you pass away. The total paid-up value is the sum of the paid-up value plus the bonus.

The amount you will receive if you cancel the insurance is known as the special surrender value. The surrender value factor multiplier is multiplied by the total paid-up value (paid-up value + bonus).

The surrender value factor is a proportion of the total value of the contract plus the bonus. For the first three years, it is zero, but it begins to rise in the third year.

Conclusion

Endowment policy surrender value makes sense only if the money obtained (surrender value) can be placed in a product that would yield a higher return than the policy would have after its term.

Surrendering a policy is usually not recommended because the customer not only loses all of the insurance benefits but also receives a significantly lesser amount than the whole premium he must have paid. If you're thinking about cancelling your endowment coverage, keep in mind how much money you've already paid that you may never get back.

Also Read:

What Is The Eligibility Criteria For Purchasing An Endowment Plan?

How Can Endowment Plans Help In Retirement Planning?

Disclaimer: This article is issued in the general public interest and is meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive and should research further or consult an expert in this regard.