Ch. 9: Policy Surrender In Child Insurance

In case you don’t want to continue with your Child plan, you have the option of ending it. This is known as a ‘surrender of the policy’.

In this article, let’s learn in detail about the surrender of a Child plan, types of surrender value, steps involved in surrendering the policy, and more.

Let’s dive right in!

What does surrendering a policy mean?

Surrendering a policy means discontinuing or terminating the policy in the middle of the policy tenure.

Reasons for surrendering a Child plan

Here are 2 reasons why you may want to surrender a Child plan -

1. You are unable to pay the premiums because of financial problems.
2. You are not satisfied with the plan you purchased and want to invest in another Child plan where you’re getting better returns.

How does surrendering a policy work?

You need to inform the insurer that you want to surrender your child plan and you will be eligible to receive a surrender value.

Types of Surrender Value

There are 2 types of surrender values -

1 Guaranteed Surrender Value

It is the percentage of total premiums paid minus the assured benefit already paid to you. This percentage is known as the Guaranteed Surrender Value Factor.

The Guaranteed Surrender Value excludes the premiums paid for riders. In some products, accrued bonuses (if any) are excluded too - this, however, will vary across products.

Insurance companies will give you a benefit illustration at the time of buying the Child plan. This benefit illustration will lay out the guaranteed and non-guaranteed benefits under the policy. It will mention details about how the insurer will invest your premiums, the charges they will incur, how your investment will grow, etc. It will also mention the Guaranteed Surrender Value you will receive depending on the year you surrender the Child plan.

How is the Guaranteed Surrender Value calculated?

Here’s the formula for calculating the Guaranteed Surrender Value -

GSV = (GSV Factor × Total Premiums Eligible For GSV) + (GSV Factor × Accrued Bonuses (if any)) – (Already Paid Assured Payouts)

Here’s an example that will help you understand this in a better way.

Say Ashi buys a Participating Child plan worth Rs. 25 Lakhs for her 5-year-old daughter to save money for both her education as well as marriage. Ashi buys the Child plan for a duration of 20 years. She chooses the limited pay option - so, she will have to pay an annual premium of Rs 2,50,000 for 10 years. The insurance company will pay the assured benefits over a span of 3 years when her daughter turns 18 - that is 3 years after the premium payment tenure is completed.

In the 5th year, Ashi decides to surrender the Child plan. Since the policy is surrendered before the premium payment duration gets over, the insurance company won’t make any assured payouts under the plan.

Now, let’s assume that the GSV factor for Ashi’s policy during the 5th year is 20%, and the bonuses of Rs. 20,000 are accumulated under her policy until now.

So…

GSV factor	20% (assumed)
Total premiums paid	Rs. 12,50,000 (5 x 2,50,000)
Accrued bonuses	Rs. 20,000
Assured payouts	0

The GSV for Ashi’s plan will be calculated using the formula-

GSV = (GSV Factor × Total Premiums Eligible For GSV) + (GSV Factor × Accrued Bonuses (if any)) – (Already Paid Assured Payouts)

= (20% x 12,50,000) + (20% x 20,000) - (0) = 2,50,000 + 4000 = Rs. 2,54,000

Therefore, Ashi is entitled to receive a Guaranteed Surrender Value of Rs. 2,54,000 under the Child plan, against the premiums of Rs. 12,50,000 she has paid.

2 Special Surrender Value

This type of surrender value is not guaranteed. Special Surrender Value is also known as Non-guaranteed Surrender Value and may be revised by the insurance company from time to time, subject to prior approval from the IRDAI.

The Special Surrender Value may be revised based on several things, like -

• Sum Assured
• Bonuses
• Policy tenure
• Premiums you’ve paid
• Investment returns
• Market value of financial assets like stocks, etc.
• Demographic and other factors like age, etc.

**How is the Special Surrender Value calculated?**

Here’s the formula for calculating the Special Surrender Value -

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

Let’s take Ashi’s example again to understand how much Special Surrender Value she will be entitled to receive under her plan.

SSV factor	20% (assumed)
Sum assured	Rs. 25,00,000
Total no. of premiums paid	5
Total no. of premiums payable	10
Accrued bonuses	Rs. 20,000

The SSV for Ashi’s plan will be calculated using the formula -

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

= [25,00,000 x (5/10) + 20,000] x 20% = [25,00,000 x 0.5 + 20,000] x 20% = [12,50,000 + 20,000] x 20% = 12,70,000 x 20% = Rs. 2,54,000

So, Ashi is entitled to receive a Special Surrender Value of Rs. 2,54,000 under the Child plan, against Rs. 12,50,000 she has paid in ten years.

Steps involved in surrendering a Child plan

1. If you’ve taken the Child plan through a financial advisor, speak to them - ask them to evaluate how much GSV and SSV you will get on surrendering the Child plan.
2. After evaluating, if you want to go ahead and surrender the policy, you’ll either have to notify the insurance company or inform the financial advisor about it.
3. Next, you will have to fill a surrender form. You can either visit the branch office and get the form, or ask the insurer to email the form. You can also download it from their website (if available).
4. Ensure you fill the form carefully and have a copy of the form for your records.
5. After you’ve filled the form, you’ll have to submit it to the insurance company along with other documents like original policy copy, cancelled cheque, bank account details, ID proof, etc.). You can either physically deliver the form and documents to the insurer’s office or ask your financial advisor to submit them to the insurer.
6. After all the required documents are submitted, the surrender amount will be credited to your bank account.

Surrender or Not to Surrender Child Plan - that is the question

It completely depends upon you - why you want to surrender. There is definitely a con - you lose out on all the benefits the scheme was designed to provide. And you receive a much lower amount than the premiums you have already paid.

However, if you feel the Child Plan does not fulfil your needs and requirements anymore, you should definitely consider terminating your policy. Or if you feel that you should invest in another product that would give you a much higher return, surrendering the current policy is advisable. It’s always up to you - so take your time, weigh your options, and make the right decision.