Ch. 10: Surrendering Whole Life Insurance Policy: Meaning, Types, Steps and Calculation

While you invest and continue paying premiums for a whole life insurance policy, there might arise a situation wherein you want to discontinue the policy. Maybe your family isn’t financially dependent on you anymore, or you want to discontinue paying them because of financial issues.

Withdrawing or surrendering your life insurance policy is a huge decision and can have serious consequences on the financial futures of you and your family. An insurance cover is meant to be a safety net that will take care of your family’s future and ensure that they are able to live a secure life, without having to give up on their dreams and goals - whether or not you are around. Discontinuing the same will, therefore, be a roadblock to a stable future.

It is important to understand what happens after you withdraw a policy and the things you should keep in mind to avoid any dire circumstances.

Let’s have an in-depth look.

As discussed before, there might be certain circumstances wherein you would want to discontinue the policy you’ve purchased, which in technical terms is called “surrender the policy”.

Surrendering the policy simply means that you decide to terminate or end the whole life policy before its maturity, i.e., in the span of the policy duration.

You must inform the insurer if you decide to surrender the policy. If you stop paying the premium and fail to inform the insurer, your policy will lapse and you will not receive any returns.

You may wish to surrender the insurance policy if -

• You are facing financial issues and aren’t able to pay premiums.
• You have found a better policy to invest in and want to take the surrender value for the same. The new policy may give you better returns than the one you currently own.
• Your initial purpose of purchasing a whole life plan has been defeated and you no longer want to continue with the policy. For instance, imagine you had bought the policy to fund your child’s postgraduate studies from a prestigious university in the UK, but they don’t want to pursue that anymore. You can opt to surrender the policy and receive the surrender value, which might be of more use to you right now.

When a policy is surrendered after a certain lock-in period, the policy acquires a surrender value. This lock-in period will depend on the premium payment term and might differ from product to product and insurer to insurer.

Guaranteed Surrender Value (GSV)

Guaranteed Surrender Value is a percentage of the total premiums paid, except for premiums paid for the first policy year.

This percentage is known as the Guaranteed Surrender Value Factor. It depends on the year of surrender, and may vary across insurers and products.

Guaranteed Surrender Value does not include -

• Any additional premiums paid for riders
• Any bonus that the policyholder may have received from the insurer - this, however, will vary across products.

When you buy an insurance policy, the insurer gives you a benefit illustration. This benefit illustration lays down the performance of your invested insurance money over a period of time. A benefit illustration gives you an idea of how your premium will be invested, what charges will be incurred, and how your investment can grow.

It will also specifically tell you the GSV you will receive - based on the year of surrender.

Here’s a simple formula for calculating GSV -

GSV = (GSV Factor × Total Premiums Paid) + (GSV Factor × Accrued Bonuses or Paid-Up Additions (if any)) – (Already Paid Survival Benefits)

Too technical. Don’t worry, here’s an example -

Soham, a 35-year-old male, buys a whole life policy with a cover amount of Rs 10 lakhs.
He has to pay a premium of Rs 20,000 every year for 14 years
He decides to surrender the policy in the 7th year

• Now, the total premium amount he has paid is Rs 1,40,000. Let’s say he has also accrued bonuses worth Rs 15,000 over this period. And let’s assume that the GSV factor for his policy during the 7th year is 30%.
• Since he has surrendered the policy during the policy payment term, he will not be paid any survival benefits.

The GSV for his policy can be calculated using the formula -

GSV = (GSV Factor × Total Premiums Paid) + (GSV Factor × Accrued Bonuses or Paid-Up Additions (if any)) – (Already Paid Survival Benefits)

GSV factor = 30% (assumed)
Total Premiums Paid = 7 x 20,000 = 1,40,000/-
Total Premiums eligible for GSV = 1,40,000-20,000 (first year premium) = 1,20,000/-
Accrued paid-up additions / bonuses = 15,000/-
Survival benefits = 0

GSV = (GSV Factor × Total Premiums Paid) + (GSV Factor × Accrued Paid-Up Additions) – (Already Paid Survival Benefits)

= (30% x 1,20,000) + (30% x 15,000) - (0)

= 36,000 + 4500
= 40,500/-
Therefore, Soham is eligible to receive Rs 40,500 as the policy GSV, against Rs. 1.40 Lakhs he paid in seven years.

Special Surrender Value, also known as non-guaranteed surrender value, is another type of surrender value offered to you - in all types of whole life plans. It reflects the actual market value of the investments and is determined periodically by the insurance company. Generally, it is always equal to or higher than GSV.

It is pertinent to note that SSV is not guaranteed and may be revised by the insurer on the following grounds -

• Sum Assured
• Bonuses
• Policy term
• Premiums paid
• Changing investment returns
• Market values of underlying assets like stocks, commodities, etc.
• Demographic experience and other factors.

In the initial year of the policy purchase, the SSV is generally quite low and marginally better than GSV. It increases as you keep paying more premiums and move towards maturity. The more premiums you pay, the more the surrender value!

Here’s a simple formula for calculating SSV -

SSV = [Original Sum Assured x (No. of Premiums paid/No. Of Premium payable) + Total bonuses received ] x Special Surrender Value Factor

Please note that any change in the methodology/formula for calculating the SSV factor shall be subject to IRDAI approval.

Let’s take Soham’s example again to understand the SSV his policy will have accrued. Let’s assume the SSV Factor as 30%. So, in his case -

SSV factor = 30% (assumed)
Sum Assured = 10,00,000/-
Total No. of Premiums Paid = 7
Total No. of Premiums Payable = 14
Accrued paid-up additions / bonuses = 15,000/-

SSV = [10,00,000 x (7/14) + 15,000] x 30%
= [10,00,000 x 0.5 + 15,000] x 30%
= [5,15,000] x 30%
= 1,54,500/-

Hence, Soham is entitled to receive Rs 1,54,500 as his policy Special Surrender Value.

• First, speak to your advisor and evaluate the amount you will receive by surrendering your policy, and whether it makes sense to you.
• Evaluate whether you have an option of GSV and SSV.
• Once you are sure, you will need to notify your intent of surrendering the policy to the insurance advisor from whom you’ve bought the insurance policy. Alternatively, you can call or visit the branch office of the insurer.
• Next, you will be provided a surrender form. This can be given to you in person, through email, or some insurers will have the form on their website and you can download the same.
• You will have to fill this form out diligently. This is a very important step, because it’s a legal request to the company, specifying your surrender.
• Make sure you have a copy of the form for your records.
• Next, you need to submit this form along with required papers (original policy copy, cancelled cheque, bank account details of policyholder, proof of identification such as voter’s ID, PAN, or driving licence, etc.) to the insurer. This can be done through your insurance advisor, or by physically delivering this to the insurer’s office. After this, the surrender value amount will be credited to your bank account.

As we all know, a whole life insurance policy is a sure-shot way of securing both your and your family’s financial future. Surrendering a policy might hamper that. Hence, it is extremely crucial to have a thorough knowledge of how things unfurl when you withdraw a policy or wish to stop paying premiums. Read your policy documents, speak to your financial advisor and understand the tiniest of details to be aware of the consequences.