Ch. 10: Surrender Money Back Policy - All You Need To Know

When you purchase a money-back policy, there might arise certain situations wherein you do not require it anymore and wish to stop investing in it. It can be because of any financial problems, or because you have no need for it, etc. And, it is necessary to know about how the policy will give you returns for the premiums you have already paid, if you quit, say in 3 years or 5 years or 7 years.

This discontinuance is known as Policy Surrender. Let’s see what it means and how it affects the returns and benefits you get.

What does Money Back Policy Surrender mean?

It means discontinuing or terminating the Money Back policy before the maturity date. After paying a stipulated premium and continuing the policy for a certain period, your policy acquires something called a Surrender Value. And if you choose to surrender after that period of time, you get the stipulated amount.

If you decide to surrender the policy, you need to immediately inform the insurer. Please remember, if you stop paying the premiums and fail to notify your insurer, the policy continues as a reduced paid-up policy with reduced benefits.

Reasons for surrendering a policy

You can choose to withdraw your Money Back Plan, if -

• You are facing some financial problems and not being able to pay the premiums.
• The existing plan did not meet your expectations, and you want to invest in any other plan that promises better returns.
• Your initial purpose of buying the Money Back Policy has changed and you no longer find the need to continue with it.

What is a Surrender Value?

It is the amount the insurance company will pay you if you terminate your Money Back policy before the policy term ends. For the policy to acquire a surrender value, you must pay all the due premium amount for at least 2 years.

Types of Surrender Value:

It is mainly of 2 types. Let’s take a detailed look at them.

Guaranteed² Surrender Value It is the percentage of total premiums paid minus the assured benefit already paid to you. This percentage may vary across products and insurers.

The Guaranteed² Surrender Value excludes the premiums paid for riders. In some products, accrued bonuses (if any) are excluded too. This, however, will vary across products.

In the case of Money Back policy, if any survival benefit is paid to you during the policy tenure, then the same will be deducted from the guaranteed² surrender value.

How is the Guaranteed² Surrender Value calculated?

You can calculate your Guaranteed² Surrender Value using this formula -

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

Here’s an example that will help you understand the intricacies better.

Suppose, Ria buys a Money Back Plan with a sum assured of Rs. 30 Lakhs. She buys it for a duration of 20 years. She chooses the limited pay option - so, she will have to pay an annual premium of Rs. 1,00,000 for 10 years.

Now in the 6th year, due to an unforeseen situation of job loss, Ria decides to surrender the Money Back plan. In her policy, the Survival Benefit is expressed as a percentage of the sum assured, and it is paid once in every 10 years, and the time-frame begins from the day the policy is issued. However, Ria surrenders in the 6th year of the tenure, so she will not be receiving any Surrender Value under her policy.

Now, let’s assume that the GSV factor for Ria’s policy during the 6th year is 20%, and the bonuses of Rs. 20,000 are accumulated under her policy until now.

Therefore

GSV factor	20% (assumed)
Total premiums paid	Rs. 6,00,000 (6 x 1,00,000)
Total premiums eligible for GSV	Rs 6,00,000
Accrued bonuses	Rs. 20,000
Survival Benefits	0

The GSV for Ria’s plan will be calculated using the formula - GSV= (GSV Factor × Total Premiums Eligible For GSV) + (GSV Factor × Accrued Bonuses (if any)) – (Already Paid Survival Benefits)

= (20% x 6,00,000) + (20% x 20,000) - (0) = 1,20,000 + 4000 = Rs. 1,24,000 Therefore, Ria will receive a Guaranteed1 Surrender Value of Rs. 1,24,000 under the Money Back plan, against the premiums of Rs. 6,00,000 she has paid.

Special Surrender Value Unlike the previous type, this surrender value is not guaranteed1.

The Special Surrender Value depends on several factors, like -

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

Depending on the above factors, the Special Surrender Value may be revised by the insurance company from time to time, but always with the prior approval from the IRDAI.

How is the Special Surrender Value calculated?

You can calculate your Special Surrender Value using this formula

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

Now, let’s take Ria's example again to learn how much Special Surrender Value she will be entitled to receive under her plan. Let us assume that the SSV factor for her policy, at the time of surrender, is 20%.

SSV factor	20% (assumed)
Sum assured	Rs. 30,00,000
Total no. of premiums paid	6
Total no. of premiums payable	10
Accrued bonuses	Rs. 20,000

The SSV for Ria’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

= [30,00,000 x (6/10) + 20,000] x 20% = [30,00,000 x 0.6 + 20,000] x 20% = [18,00,000 + 20,000] x 20% = 18,20,000 x 20% = Rs. 3,64,000

Therefore, Ria is entitled to receive a Special Surrender Value of Rs. 3,64,000 under her Money Back policy.

Important points to keep in mind

• You need to inform the insurer that you want to surrender your Money-back policy, and you will be eligible to receive a Surrender Value.
• Reasons to surrender and some specific documents need to be submitted to the insurer.
• Once the surrender value is paid to you, the policy cover will cease.

Documents you are required to submit for Policy Surrender

1. Original policy documents
2. Cancelled cheque with the policyholder's name on it
3. In case the cancelled cheque does not have a pre-printed name, and the account number or a new account is mentioned on the cheque, then the passbook copy/bank statement having the pre-printed name and the account number is required.
4. ID proof (PAN Card, Aadhaar Card, Passport, Driving Licence, Voter ID)
5. Policy surrender or cancellation form
6. Latest contact details
7. NRE (an NRE account is a bank account opened in India in the name of an NRI, to park their foreign earnings) bank statement reflecting any premiums paid from the NRE account

Before withdrawing, you must be mindful and weigh your options carefully. You need to know that when the policy cover will cease, you will lose out on the benefits the plan was designed to provide. And although you receive surrender values, the amount will not be as much as the premiums you have already paid.

However, if you are facing financial distress, or if you feel the Money Back policy does not fulfil your needs and requirements anymore, you should definitely consider withdrawing your policy and investing in something that actually helps you.

And, did you know you can stop paying the premiums and still keep the policy active, with reduced benefits of course? Read more about this in the next article!