CHANAKYA NATIONAL LAW

UNIVERSITY

SUBJECT- INSURANCE LAW

PROJECT WORK ON

SURRENDER AND PAIDUP

VALUE OF INSURANCE POLICY
SUBMITTED TO- Mr. SHAIWAL SATYARTHI

SUBMITTED BY-

PRAGYA SINGH
ROLL NO:- 578

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8TH SEMESTER
ACKNOWLEDGEMENT

The writing a project has one of the most significant academic challenges I
have ever faced. Any attempt at any level can't be satisfactorily completed
without the support and guidance of learned people. I am overwhelmed in
all humbleness and gratefulness to acknowledge our depth to all those who
have helped us to put these ideas, well above the level of simplicity and into
something concrete effectively and moreover on time.
I am very thankful to our subject teacher Mr. Shaiwal Satyarthi for his
valuable help. He was always there to show us the right track when we
needed

his

help.

He

lent

his

valuable

suggestions,

guidance

and

encouragement, in different matters regarding the topic. He had been very

kind and patient while suggesting me the outlines of this project and
correcting my doubts. I thank him for his overall supports with the help of
which I was able to perform this project work.
I would also like to thank my colleagues, who often helped and gave me
support at critical junctures during the making to this project. Last but not
the least, I would like to thank my friends who helped a lot in gathering
different information, collecting data and guiding each other from time to
time in making this project.

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RESEARCH METHODOLOGY:
The Researcher has adopted Doctrinal Method of legal research.

SOURCES OF DATA:
Primary sources include Bare Acts. Secondary Sources, includes books, journals, articles,
websites, online data, etc.

AIMS & OBJECTIVES:

The aim of the researcher is to study the insurance policy.

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TABLE OF INDEX
Chapter 1- Introduction
6

Chapter 2- Surrender Value of insurance policy

10

5-

7-

Chapter 3- Paid up Value of insurance policy

13

11-

Chapter 4- When should one consider paid-up or surrender options in the first place
15

14-

Chapter 5- Conclusion
16

Bibliography
17

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CHAPTER 1- INTRODUCTION
Financial planners advise that one should carefully assess ones need for insurance and the
features of a policy before signing on the dotted line. An insurance plan bought in a hurry to
save tax or sold by some insurance agent or a bank executive persuaded are common situations.
Those who are wondering whether they should discontinue their traditional life insurance
policies have the following options.

Let the Policy Lapse

Surrender the Policy
Make the Policy Paid up
Take loan against the policy1

If a life policy has lapsed following the assureds failure to pay a premium, then if accrued
benefits are to be carried over it is necessary for the parties to enter into a fresh agreement to
revive the policy. The ordinary rules of offer and acceptance are here applicable, so that if the
assured under a lapsed life policy has sent the premium to the insurers but they have accepted

1 M N Srinivasans Principles of Insurance Law, 9th edition, 2009, Lexis Nexis

Butterworths Wadhwa, Nagpur.
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subject to the assured completing a declaration of good health, there is no cover until the
declaration has been made.2
Halfway through the policy, an individual might want to discontinue it and take whatever
money is due to him/her. The amount the insurance company then pays is known as the
surrender value. The policy ceases to exist after this payment has been made by the insurer to
the concerned policyholder. It must always be remembered that an individual will lose out on
returns if he/she withdraws his/her policy before time. If an individual stops paying the
premiums, but does not withdraw the money from his/her policy, the policy is referred to as paid
up. The sum assured is reduced proportionately, depending on when he/she has stopped paying
the premiums. The concerned policyholder can then receive the amount at the end of the term.3
The sum of money an insurance company will pay to the policyholder or annuity holder in the
event his or her policy is voluntarily terminated before its maturity or the insured event occurs.
This cash value is the savings component of most permanent life insurance policies, particularly
whole life insurance policies. Also known as "cash value", "surrender value" and "policyholder's
equity".4
Surrender value is the amount the policyholder will get from the life insurance company if he
decides

to

exit

the

policy

before

maturity.

Paid up value is the reduced amount of sum assured paid by the insurer in case of
discontinuation of the payment of premiums after paying the full premiums for the first three
years.5
Life insurance policies usually last the insured's lifetime, but some policies can be paid up
completely till a specified age. A life insurance policy in which if all the premium payments are
2 Fontana v. Skandia Life Assurance Ltd., unreported, 2003.
3http://www.medindia.net/insurance/surrender-value-paid-up-value.htm
4 http://www.investopedia.com/terms/c/cashsurrendervalue.asp
5 http://www.moneycontrol.com/glossary/insurance/paidup-value_290.html
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complete and the insured is free of all payment obligations, the policy stays intact until insured's
death or termination of the policy is called paid-up policy.

Paid-up policy falls into the category of traditional insurance plans. The sum assured is limited
to the paid-up value. It is calculated as the ratio of number of premiums paid to the total number
of premiums that were supposed to be paid according to the policy multiplied by the sum
assured at maturity.6
When the premium for a life insurance policy is not paid on time and it lapses, then the Policy
acquires a Paid-up Value and it is considered a Paid-up Policy, such that the Sum Assured of the
policy is reduced in proportionate with the number of premiums paid and total number of
premiums of the policy. A Paid up Policy acquires a Paid-up Value. If a policy needs to be
surrendered or a loan needs to be availed, it is taken as a percentage of the Paid-up Value.

CHAPTER 2- SURRENDER VALUE OF INSURANCE

POLICY
Surrendering the policy means exiting from the policy before the maturity. It is the voluntary
termination of the insurance contract by the policyholder before the maturity or premature
encashment of the life insurance policy. Loosely defined, the word surrender can mean
cancelling or terminating the policy or simply returning it to the insurance company before the
tenure has been completed or before the policy matures. You might have a number of reasons
why you want to surrender a policy beginning from your inability to pay the premium to
realizing that you are at the short end of the stick as far as the product is concerned and that you
should not have bought it in the first place. The top three reasons for traditional policy surrender
are:
6http://economictimes.indiatimes.com/definition/paid-up-policy
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low bonus or benefits

wanting to get proper insurance through term life
better investment options.7

On surrendering a policy:

The life cover or protection ends.

The tax benefit, if availed of on the premium paid till then, may be reversed if
surrendered before premium has been paid for two years and 5 years for ULIP products
after the date of commencement of policy.

On surrendering before the maturity date the cash value that you receive is called the
surrender value of a policy.

Policies usually acquire a surrender value after premiums have been paid for
three years.

If any extra premium is paid towards Accident benefit etc., it is usually excluded.

The surrender value is calculated by the insurance company depending upon the
time for which the policy was in effect (the age of the policy), the total duration
of the policy, the premiums paid and any bonus accrued.

If the policy is in its initial stages (3-4 years old) the surrender value is only
about 30% of the premiums paid plus any bonuses that may have accrued till
then. The closer you are to the maturity date of your policy, the higher is the
amount you get when you exit. Towards the end of its term, this can be as high as
80% of the premium. Even after three years, during the early stages of policy the
surrender value is just a fraction of the total premiums paid.

Needless to say, when you surrender, you do not have to pay any future premiums and your life
insurance cover from the company stands terminated.

7 http://www.bemoneyaware.com/blog/life-insurance-surrender-paidup-lapse-loan/
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When you surrender, the insurance company has to give you some money in return as you paid
some premiums each year a part of this premium went towards providing risk and some part
went into investments it is this investment part, which would have grown in value, that will be
returned to you after applying some surrender charges which varies from policy to policy. Apart
from that, you might have been eligible for some bonus as well. Note that as far as the bonus is
concerned, it is reduced by a factor called surrender value factor.
In calculating surrender value, the amount due on the policy and payable should be interpreted
in favour of policy holder.8
To understand this better, let us look at the formula by which insurance companies arrives at the
money they give to you.
Surrender Value = [{(Number of premiums paid / Number of premiums payable) * Sum
Assured } + Accrued bonuses ] * Surrender value factor
If I want to explain with an example, let us say you have paid premium of Rs 14,000 each year
for 3 years now for a policy with Sum Assured of Rs 2 lakhs which has a tenure of 15 years.
You decide to terminate or surrender the policy.
Assume that you have accumulated a bonus of Rs 10,000.
The surrender value = [{(3/15)*2,00,000} + 10,000]*0.25
= Rs 12,500
If you had stuck with paying the premiums for 6 years, the value would have been Rs 22,500
if you look at the above example, you will note that the more number of premiums you pay,
more is the surrender value.
Note that there is a rough thumb-rule to get to this surrender value insurance companies
usually pay 30% of the first 3 years premium back to you, minus the first year premium.

8 Avtar Singh, Law of Insurance, 2nd edition, 2010, Eastern Book Company, Lucknow
at p. 57.
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It must be noted that the surrender value is given out only when the life insurance policy has
been in existence for 3 years. So if you want to surrender after a year or two, you will get no
money. The money is received from the insurance company only after 3 full premiums have
been paid.
Another point to note is that the insurance regulator, IRDA has asked that there be no surrender
charges if the policy is surrendered after 5 years.9
When does a life insurance policy acquire surrender value?
A regular premium policy acquires surrender value after the policyholder has paid the premiums
continuously for three years. If, after paying premiums for three years, you do not wish to
continue with the policy, you can convert it into a paid-up one, freezing your investments at that
level. However, you need to make sure that you keep track of this policy till it matures.
What do policyholders stand to lose when they exit the policy?
Once you decide to exit the insurance policy, all the benefits associated with it including the
protection cover will cease to exist. Therefore, ideally, you should consider terminating the
policy only if you believe that you have been sold a policy that does not fulfil your
requirements, or the features prove to be different from what was promised to you.
Also, if you surrender the policy during the early years of the policy, say three years from its
inception, the surrender value will amount to roughly 30 per cent of the premiums paid to date.
Also, insurance companies exclude the premium paid in the first year while calculating the
surrender value. In case of unit-linked insurance plans (ULIP), particularly, the insured stands to
lose a great deal as the premium allocation charges in these schemes are front-loaded. In other
words, a sizeable chunk of the premium paid in the initial years goes towards charges, including
agent's commission, and the remaining, substantially reduced amount, is directed to your fund.
Do all policies acquire surrender value?

9 http://www.thewealthwisher.com/2013/01/15/what-is-surrender-value-and-paidup-value-of-a-life-insurance-policy/
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No. Only those policies which contain an embedded savings component like ULIPs and
endowment plans will partially return the amount invested for the life cover. Surrendering
term plans, which are pure protection covers with no savings element, will result in lapsation of
the policy.
Is surrender value relevant if a policyholder does not terminate his policy?
The surrender value acquired by your policy is also used to calculate the loan amount you are
eligible for. Some insurers grant loans against life insurance policies to the extent of 85-90 per
cent of the surrender value. LIC offers loans against insurance policies at the rate of nine per
cent per annum.
Alternatively, you can also pledge the policy to a bank and borrow against the same. Do note,
however, that borrowing during the initial years of the policy may not be a good idea because of
the low surrender value it would acquired till then.10

CHAPTER 3- PAIDUP VALUE OF A LIFE INSURANCE

POLICY
When you make a policy paid up,

You dont have to pay any more premiums, but the policy is not

cancelled.
Instead the policy continues till maturity with a reduced Sum Assured.
This means that you would be halting future contributions to the

10 http://articles.economictimes.indiatimes.com/2009-1209/news/28435556_1_surrender-value-policy-premium
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policy, but still let it run to maturity. The reduced sum assured is

called the Paid up value of the policy.

Paid up value is calculated as a proportion of premiums paid versus

the premiums actually needed to be paid.

If you have bought insurance policy with additional benefits such as
future bonuses and dividends, these would be lost in such a policy.
However, you would retain any bonuses paid out before you made the
policy paid-up and would be paid on maturity( end of the policy

term) or on death, whichever is earlier

Riders such as Accident benefit and critical illness riders do not
acquire any paid-up value.11

Paid-up value applies to traditional products such as money back policies,

endowment plans and whole life insurance.
Paid-up value is the reduced amount of sum assured paid by the insurance
company, in case the policyholder discontinues payment of premiums. After
payment of three years of premium in traditional life insurance plans, your
policy automatically acquires paid-up value. If you continue to pay further
premiums then the paid-up value of your policy increases every year.
If for any reason, you are unable to pay further premiums (after three years
of premium payment) then the paid-up value will remain same throughout
the policy period. If the premiums are discontinued then no further bonus
will be added to the policy. The death claim will be restricted to the paid-up
value of the policy.
One can continue to hold the policy and get the paid-up value at the end of
term or can opt for withdrawal by surrendering the policy. It is advisable to
surrender the policy if you do not want to continue. It will give you
approximately 6% return per annum on the surrender value if you hold the
policy till the end of the tenure.
11 http://www.bemoneyaware.com/blog/life-insurance-surrender-paidup-lapse-loan/
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This insurance cover will continue till the end of the term or death of the
policyholder, whichever is earlier. The insurance cover will be Paid-up to the
reduced sum assured or the Paid-Up Value. The Paid-Up policy is also eligible
to receive the proportionate bonus.
Paid-Up Policies can further be surrendered if the policyholder wishes to
take the money out. In that case, a certain surrender charge is deducted,
depending on the tenure left for the policy to mature and the remaining
amount can be paid out to the policyholder as Surrender Value. Even loans
can be availed on Paid-Up Policies. If the loan amount is not paid back, then
the Paid-Up Policy can be surrendered by the insurer to recover the loan
amount.12
Where the assured has not paid the premium on the due date, the insurer
may have a choice of remedies:
(a) Proceedings for payment of premium may be brought;
(b)Claims may be rejected until the premium has been paid;
(c) The policy may be forfeited or determined for breach.13
Lets take an example: If you have bought a 20-year insurance plan with
sum assured of Rs. 2 lakh and you are paying Rs. 10,000 premium annually.
You have regularly paid premiums for five years and now you dont want to
pay the premiums for the remaining 15 years. Assume that the total bonus
of Rs. 35,000 is credited to your plan for the five years, then the paid-up
value after completion of five years will be:
Paid-up value = [(Number of premiums paid / Total premiums
payable * Sum assured) + bonus credited till the policy is paid)]

12 http://www.myinsuranceclub.com/guides/paid-up-value-of-a-life-insurance-policy
13 Colinvauxs Law of Insurance, 8th edition, 2009, South Asian Edition, London at
p. 289.
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i.e., 5/20*2,00,000 = Rs. 50,000 + Rs. 35,000 (bonus) . Paid-up value = Rs.
85,000 and the death claim in this case is restricted to Rs. 85,000 only if
you choose to continue the plan without further contribution. A paid-up
policy loses all the additional benefits attached to the policy such as double
accident cover and critical illness cover among others. This reduced
insurance cover will continue till the end of the term or death of the
policyholder, whichever is earlier. The insurance cover will be paid-up to the
reduced sum assured or the paid-up value. It is advisable to separate your
insurance and investment need.

14

14
http://flame.org.in/KnowledgeCenter/Paidupvalueofatraditionalinsurancepolicy.aspx
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CHAPTER 4- WHEN SHOULD ONE CONSIDER PAID-UP

OR SURRENDER OPTIONS IN THE FIRST PLACE
Difference between Surrendering and Making Policy Paid up
Surrender a Policy

Make a Policy Paid

Up

Stop paying premiums

immediately?

Yes

Yes

Get money immediately?

Yes -Fraction of premiums

paid

No

Insurance cover continues?

No

Yes for reduced

amount

Get money at the end of the

tenure?

No, rather immediately

Yes the paid value

To make a policy paid-up means to simply stop paying premiums. The policy does not
cease. You get a reduced cover on death or at maturity. On the other hand, to surrender a
policy means to return the policy and walk off with whatever little payout you get,
hopefully to invest in other avenues where they'd earn better.
Case (a): If you have planned your goal(s) properly taking realistic inflation rates into
account, calculating the amount need to be saved each year or each month and then
purchased a life insurance product with an approximate idea of how you will get upon
maturity and whether that would be enough for your goals, then and only then you should
continue your policies. This scenario also assumes you have enough money to meet all your
financial goals, contingencies, expenses, loans and that you have adequate life and health
insurance! (unfortunately this is pretty rare if not impossible!)
Case (b): Say you need to save Rs. 10,000 each month for a goal and you have an
insurance product with an (effective) monthly premium of only Rs. 2,000 then you could
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continue the policy. Of course you need to invest the rest of the money in appropriate
instruments. The policy can serve as a debt instrument offering you limited but guaranteed,
tax-free returns.
If your effective monthly premium is close to or more than Rs. 10,000 and if case (a) is
satisfied in entirety then also you could continue. If any part of case (a) does not hold true
then you should consider paid-up or surrender options.
After realizing that the insurance product is unsuitable for your goal dont rush to get it
paid-up

or

surrendered.

(i) If you have paid premium for only one or two years. Get out of it and minimize your
loss. Dont listen to those who tell you to pay for three years before making it paid-up. You
will only lose more. Do the math and figure this out.
(ii) If you have paid for three years and have claimed 80C deductions with the policy then
make it paid-up. If you have not claimed such deductions you could consider surrendering
using the comparison option provided in the calculator.
(iii) If you have paid for five years or more then you need to decide between paid-up and
surrender options.
(iv) If the policy is close to completion then leave it be. Calculate how much you need for
the goal, estimate the short-fall and prepare accordingly.15

15 http://freefincal.com/insurance-policy-surrender-value-paid-up-value-calculator2/
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CHAPTER 5- CONCLUSION
Surrendering the policy means exiting from the policy before the maturity. It is the voluntary
termination of the insurance contract by the policyholder before the maturity or premature
encashment of the life insurance policy. If you surrender you will get the money now and in that
case you can use it for some productive purposes. You can probably align that money for your
long term goals and make it grow. The insurance cum investment policies will give you returns
to the tune of 7% over a long period of time that is what inflation is at so you are not going to
make any money in the real sense. Surrendering an endowment policy makes sense only if the
amount (surrender value) received on doing so and invested in another product can generate a
better return than the policy would have on completion of tenure. It is usually not recommend
surrendering a policy as the customer, because it not only loses out all the benefits of the
insurance scheme but also receives a much lower amount than the total premium he must have
paid. If you plan to dump your endowment policy, bear in mind all the money you have paid
that you may never get back.
But, when you make a policy paid up, you dont have to pay any more
premiums, but the policy is not cancelled. Instead the policy continues till
maturity with a reduced Sum Assured. This means that you would be halting
future contributions to the policy, but still let it run to maturity. The reduced
sum assured is called the Paid up value of the policy. And if you make it paid-up,
then you will get the money only after the tenure is over which might be too late in the day for
you. With the inflation monster, that money might look a little for you by the time you get it as
its purchasing power should have been lowered by then. The decisions of which way to go is
very very subjective. So, do not blindly make a decision do your planning and depending on
your own personal factors, take the right call with your advisor on what makes sense for you.

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BIBLIOGRAPHY
BOOKS:

M N Srinivasans Principles of Insurance Law, 9th edition, 2009, Lexis Nexis

Butterworths Wadhwa, Nagpur.

Colinvauxs Law of Insurance, 8th edition, 2009, South Asian Edition, London.
Avtar Singh, Law of Insurance, 2nd edition, 2010, Eastern Book Company,
Lucknow.

WEBSITES:

http://www.medindia.net/insurance/surrender-value-paid-up-value.htm
http://www.investopedia.com/terms/c/cashsurrendervalue.asp
http://www.moneycontrol.com/glossary/insurance/paidup-value_290.html
http://economictimes.indiatimes.com/definition/paid-up-policy
http://www.thewealthwisher.com/2013/01/15/what-is-surrender-value-and-paid-upvalue-of-a-life-insurance-policy/
http://freefincal.com/insurance-policy-surrender-value-paid-up-value-calculator-2/
http://www.myinsuranceclub.com/guides/paid-up-value-of-a-life-insurance-policy
http://flame.org.in/KnowledgeCenter/Paidupvalueofatraditionalinsurancepolicy.aspx

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