Insurance Policy Paid up vs Surrender options with calculator

"I just realized that I have junk insurance policies which won't serve my financial goals! What should I do? Do I continue? Make them paid-up or do I surrender them?"

Most of you will agree that this is a common enough problem. To address this, lets first set the record straight. No insurance policy is junk. The decision to invest in such polices without prior planning is junk (excuse the bad grammer). Lets move on while keeping in mind that the following does not apply to ULIPS. I will also not deal with why these policies are considered as 'junk'. I think you can find enough resources for that.

To the uninitiated here are some crude definitions.

Paid-up: To make a policy paid-up is to stop paying premiums. The insurance cover will reduce appropriately and reduced sum assured along with applicable bonuses paid thus far will be given to the policy holder after the policy term is completed. A policy can be made paid-up after a minimum number of years, usually three.

Surrender: To surrender a policy is to severe all ties with the insurer. The policy becomes eligible for a surrender value after a minimum number of years (usually three and usually same as paid-up eligibility). If a policy is surrendered before five years all 80C deductions, if claimed, will become void and the individual will have to pay tax for total deductions made thus far in the year of surrender according to his or her tax slab. For policies issued on or after April 1st 2003, if the annual premium is more than 20% of sum assured then the surrender value is taxable regardless of when you surrender. For polices issued on or after April 1st 2012, the corresponding number is 10% and for those issued after the DTC kicks in it is 5%. The surrender value depends on a factor (known as surrender value factor!) and it depends on the age of the policy and bonuses offered and is heavily insurer dependent.

I have made a calculator (based on LIC surrender value factors) by which one can calculate the paid-up value, the surrender value (both with different options). You can also compare these options and decide which makes better financial sense.

First let us ask: When should one consider paid-up or surrender options in the first place?

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 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 don’t 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. Don't 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.

Choosing between paid-up and surrender options:

Please keep in mind, for policies issued on or after April 1st 2003, if the annual premium is more than 20% of sum assured then the surrender value is taxable regardless of when you surrender.

To make a choice consider an example: use the calculator to find out paid-up and surrender values (these come with options dependent on bonus rates, choose one you are comfortable with). Say the paid-up value  for a 20-year policy after 4 years is Rs. 4,00,000 and the surrender value taking taxes into account (if applicable) is Rs. 1,20,240. The paid-up value is much higher but it will be paid only after 16 years, while the surrender value will be paid immediately. If you were to invest Rs. 1,20,240 in an instrument, the calculator determines the rate of (post-tax) interest needed to generate Rs. 4,00,000 after 16 years. This is 7.8%. For a 16 year time frame a 7.8% post-tax return can be achieved quite comfortably by investing in a balanced mutual fund. Such funds if chosen well are capable for providing double digit returns (long-term returns for such funds more than 65% equity component are tax-free as of now). So in this case surrendering makes more sense.

What instead of 7.8% and 16 years the numbers are, say, 7% and 10 years or less. Then you could consider the paid-up option over the surrender option. Although surrendering can provide better returns the risk increases. What if the numbers are 12% and 12 years. Here again the paid-up option is a safer bet although surrendering can potential fetch better returns.  So its a question of balancing risk and return.
If you have higher risk appetite and if your policy has more than 5 years left then you could invest a good portion of the surrender value in equity instruments. If your policy has less than 5 years left then best would be paying premiums for the full term. So the question of paid-up or surrender arises only for policies which are many years away from completion.

Finally let me add that ULIPs are very different ball-game.Although non-ideal, if you stay invested in them and manage the equity and debt portions well they could act like a reasonably good balanced mutual fund.

Let me know if I have missed out any scenario. If you have recently surrendered a policy please test the calculator and let me know how it works. If you have access to special surrender values of other insurers please send them to me. If you find the article and calculator useful so share them with your friends.

A balanced view is necessary while making a call on such policies and I hope I have done that to a reasonable extent. The main reason why I wrote this is a highly disappointing and biased article from Moneylife

Instructions and download link for the Insurance Policy Surrender Value and Paid-up Value Calculator

Source for LIC surrender value factors (pdf file)

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20 thoughts on “Insurance Policy Paid up vs Surrender options with calculator

  1. dilip

    hi sir,
    I have two ULIPS and surrendered one of them recently(loss of 16K).
    other one is Pension plan.I am confused about surrendering or to continue with it after reading yr it possible to make decent return from ulips say 10%?.

    1. pattu

      Hi Dilip,

      Ulips are market linked instruments Like most MFs in the last 5 years ULIps have gone nowhere. You will need to hold onto them for the long term to see any profit.

  2. prashant m jadhav

    i have surrendered my lic policy plan 165-35. i have paid 72780 rs and get only 57972rs i want to know how LIC is calculating the surrender value?

  3. vijay

    I take the policy Hdfc children's double beniffit plan in2009 amount of 25000 annual I want to surrender now what is the surrender value of my policy

    1. pattu

      This tool is valid only for LIC policies. Kindly read policy wordings and contact HDFC to get this information.

  4. Tupan

    This is the most logical and informative article that I have read in this subject. Many Thanks for sharing.

  5. Shankarlal Meena


  6. Shankarlal Meena


  7. Subhash

    I buy jeevan saral in 2009 & want to surrender. I want to know that how much amount i will get back. Whatever i paid will be refund or not

  8. Gurbhej Singh

    how to check surrender value of my policy on my computer please suggest me. I want to know that how much amount i will get back.

    1. freefincal

      Sorry,ignore my previous comment. You cannot find your surrender value online. You need to go tothe office where you got it

  9. Atul Yadav

    Hello !!! I have LIC's The Money Back Policy taken in 2006. Total sum assured is 2.4 Lac with yearly premium of 12517 for 20 years.

    Next premium as well as bonus is due in Aug 2016.

    I am planning to surrender this policy and going for a term plan.

    Will I get Bonus if I surrender it before August ? Or I can go ahead with this years Premium, get bonus and then surrender ?

  10. Rubina

    Thank you Pattu Sir for this very informative article. I was planning to surrender my LIC policies, however after learning that all the tax benefits i enjoyed will become void and i will have to pay tax for those amounts, i am rethinking my decision.

  11. gopal

    sir meri lic policy aggent ke dwara jayda kar di hai me unko syliender karna chata hu mera jama paisa mil jaye intrest na mile tabbhi chalega plz help me me unko bhar nahi pa raha hu


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