Shyam comes across the term “value capitulation” in insurance that confuses him. Shyam approaches his neighbor and insurance agent, Banerjee to discuss the meaning of the value of surrender and how it applies to different circumstances.
Shyam: Banerjee, can you explain what surrender value means and how it differs from maturity, survival advantage and other terms?
Banerjee: Wait, try not to tire yourself out with too many terms. Entitlement to vesting and survival benefits at the end of the term. Surrender value on the other hand, is the value that the insured (soon uninsured) can expect when he decides to discontinue the policy for any reason.
Shyam: So, if one does not continue with this policy, can one still expect to receive a certain amount? This seems generous.
Banerjee: Conventional life insurance is usually a combination of insurance and investment, and the premium paid by the individual is divided accordingly. The surrender value of this investment can be paid for policies like endowment, guaranteed benefits plan, ULIPS and others. Plans that focus only on protection and not investment, a term plan for example, can offer no value to the assignment.
Shyam: How will they calculate the amount of return? Also, is it discretionary or predetermined?
Banerjee: You’ve gone from “Karim” to picking out the details with ease, my friend! In any case, you can either take a three-year guaranteed surrender value as a minimum premium or a slightly larger amount as a special surrender value. If you have paid premiums for at least three full years, the guaranteed refund will be equal to 30 percent of the premium paid after excluding the first year’s premium and any amount paid to passengers and deducting the redemption fee.
When the policy is committed for more than three to four years, the calculation will then be based on the guaranteed amount and bonuses and not the premiums paid, reflecting the investments made. As in, the total amount guaranteed is divided into the policy term paid along with the bonus payable. The sum of these two numbers is then multiplied by the surrender ratio (less than one) to arrive at the surrender value. The percentage of surrender will generally increase along with the duration of the premium paid, to incentivize staying insured.
Shyam: Useful information but I can’t understand why one would compromise on politics.
Banerjee: Yes, waiving a policy would destroy wealth and cancel any insurance protection for the individual, and it would also increase insurance costs if purchased later because the policy premium would now include premium and inflation.
If one encounters a financial need, they can always check for loans from the insurance company based on the surrender value owed. This allows protection as well as control over any liquidity needs that may arise.
Shyam: One should make a conscious call based on the information at hand.
Banerjee: Yes, the surrender value can be checked on the insurance company’s website by entering the policy details and other relevant information, which will then provide an estimate of the surrender value that can be expected.