Ch. 8: Surrendering and Reduced Paid-Up in Annuity Plans

An Annuity Plan is a simple product. You need to make a single premium payment (in the case of a Single-Premium Annuity Plan) or multiple premium payments (in the case of a General Annuity Plan). Then, after you retire, the insurance company will pay a regular income or annuity to you for the period you opt for. This income will be paid to you based on an annuity rate that is fixed when you buy the plan.

Now, there might be a possibility that you’re not satisfied with the annuity or income given by the plan. This might be because you feel it's insufficient to support your lifestyle. Or the current annuity rate under the same plan or any other plan is significantly higher than the one you locked in when you purchased the plan. In such cases, you may want to discontinue your current plan and invest in a plan with a higher annuity rate. This discontinuance is known as ‘surrendering’.

SURRENDERING AN ANNUITY PLAN

When you decide to surrender or discontinue an Annuity Plan, you’ll be entitled to receive a ‘Surrender Value’.

Surrender Value is the amount of money you’ll receive from the insurer if you decide to surrender or stop your Annuity Plan

• A Single Annuity Plan acquires a surrender value immediately, right after you make the premium payment.
• A General Annuity Plan will acquire a surrender value only if you’ve made the premium payments for at least 2 years.

There are two types of Surrender Value -

• Guaranteed Surrender Value (GSV)

  The formula to calculate the GSV under a General and a Single-Premium Annuity Plan is -
  GSV = [ (GSV Factor x Total Premiums Paid) -Total Annuity Paid (if any) ]




• Special Surrender Value (SSV)

  You’ll have to check the policy wordings or ask your financial advisor about the SSV payable under your Annuity Plan.
  
  Generally, SSV is determined on a regular basis by the insurance company and may change based on market conditions. And, any changes to the methodology/formula used to compute the SSV must be approved by the IRDAI.

The Surrender Value that will be payable under both General and Single-Premium Annuity Plans will be higher of either the Guaranteed Surrender Value or the Special Surrender Value.

Important!

• Some Annuity Plans may not acquire any surrender value - and hence, no surrender benefit will be payable under them.
• There are some Annuity Plans that only acquire a Special Surrender Value - and not a General Surrender Value.

So, ensure that you check the policy wordings/brochures or ask a financial advisor about the surrender value payable under the plan - before making a decision.

• Firstly, you’ll have to speak to your financial advisor about the GSV or SSV you’ll receive in case you surrender the Annuity Plan.
• If you want to surrender the plan, you’ll have to notify the insurance company or the financial advisor you purchased the policy from about your decision. You can also call or visit the branch office of the insurer.
• Next, there is a surrender form that you’ll have to fill out. You can get this form from the insurer's branch office, or you can ask them to email it. You can also download it from their website (if it’s available online).
• Once you get the form, you’ll have to fill it very carefully, as it’s a legal request to the company, specifying your surrender. Also, remember to keep a copy of the form for your records
• You’ll have to submit the surrender form along with several documents, like -
  
  • Original policy documents
  • Cancelled cheque with your name on it
    (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 will be required.)
  • ID proof (PAN Card, Aadhaar Card, Passport, Driving Licence, Voter ID, etc.)
  • Policy surrender or cancellation form
  • Latest contact details
  • 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
• You can submit these documents in person or ask your financial advisor to submit them on your behalf.
• The insurance company will verify the documents submitted. After successful verification, the surrender amount will be credited to your bank account.

As we read above, a General Annuity Plan acquires a Surrender Value only if you make at least two full-year premium payments under it from the date of policy inception.

Now, if your General Annuity Plan has not acquired a Surrender Value and you’ve not paid the due premiums until the grace period expires, the plan will lapse, i.e., it will end. And, all benefits under it will cease immediately.

However, if your General Annuity Plan has acquired a Surrender Value and you don’t make any further premium payments until the expiry of the grace period, then your plan will continue on a Reduced Paid-Up (RPU) basis.

Please note, continuing the plan on a RPU basis is only possible in the case of a General Annuity Plan - and not in the case of Single Premium Annuity Plans.

The annuity payable to you periodically will be proportionately reduced, which will result in a Reduced Paid-Up Annuity or RPU Annuity. This proportionate reduction is called the RPU Factor.

• The RPU Factor will be calculated as -
  

  RPU Factor = No. of Premium Instalments Paid Till Date ÷ Total No. of Premiums Originally Due For The Premium Payment Term



• The RPU Annuity will be calculated as -
  

  Reduced Paid-Up Annuity = Annuity Amount X RPU Factor

Important!
As per IRDAI rules, the annuity payable every year under an Annuity Plan cannot be less than Rs. 12,000.

• In case the RPU Annuity calculated is more than Rs. 12,000 p.a., the insurer will offer a revival period of 5 years, during which you can get back your policy. If you fail to revive your policy within these 5 years, your policy will continue on a reduced paid-up basis, and you’ll continue receiving the RPU annuity till the end of the payout period chosen by you.
• In case the RPU Annuity calculated is less than Rs. 12,000 p.a., a surrender value will be paid to you as a lump sum at the end of the revival period of 5 years from the due date of the first upaid premium. And then, your General Annuity Plan will cease.

Under a Reduced Paid-Up Annuity Plan, the death benefit that the insurer will pay to your nominee will vary based on when the death occurs.

• Death before the deferment period ends

  If the death happens before the end of the deferment period (the period between the start of the policy and when you begin receiving the payouts), the death benefit your nominee will receive will be higher of -

  
  
  
  • 105% of the Total Premiums Paid
  Or
  
• Total Premiums Paid + Guaranteed Additions* (if any)



• Death after the deferment period ends

  If the death happens after the deferment period (the period during which the insurer starts making the annuity payouts), the death benefit your nominee will receive will be higher of -

  
  
  
  • 1100% of the Total Premiums Paid
  Or
  
• Total Premiums Paid + Guaranteed Additions* (if any) - Total Annuity Amount Already Paid

The Guaranteed Addition is 1/12 times the annual Annuity and it will be paid only if you pass away. In the case of a Joint Life Annuity Plan, it will be paid on the secondary annuitant’s death.

• If you’ve purchased a Single Life Annuity Plan, the RPU annuity will be paid to you till the end of the payout period and as per the frequency chosen by you.
• If you’ve opted for a Joint Life Annuity Plan, the RPU annuity will be paid to you till your death. After you pass away, the RPU annuity will be paid to your spouse till the end of the payout period and as per the frequency chosen by you.

So, that is all from our side today. Before you decide to discontinue your Annuity Plan, ensure you understand how it will affect the annuity and death benefit payable under it - to avoid any hassles later on.