InvestorQ : What is better for old insurance policies, surrender value or Paid-up value?
swati Bakhda made post

What is better for old insurance policies, surrender value or Paid-up value?

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8 months ago

Those insurance plans that you have taken long back do not really provide you any benefit if you see that the average CAGR for those assurance plans is somewhere between 1-1.5%. These policies neither provide enough life insurance cover neither they create enough wealth to meet your long term goals. Also, these policies have pathetic returns value if you want to close these policies before maturity.

What is a paid-up option?
Under this option, you stop paying insurance premiums but do not close the policy. However, note that this option is generally applicable only after one has paid premiums for at least 3 years. The final amount that one will receive at maturity shall be reduced in proportion to the premiums paid. This sum assured is called the paid-up value. This can be calculated using the following formula:

Paid-up value = Original sum assured x (No. of premiums paid/ No. of premiums payable)

Therefore, if you decide to choose a paid-up policy option, keep that in mind that converting the policy into a paid-up policy will lock your money for the remaining term of the policy and also, the actual worth of the policy will be very less if the maturity is very far from the surrender date.

Opting for paid-up is suggested when:

  • You don’t need money, but don’t want to pay further premiums
  • When your policy maturity is very near (2-4 yrs)
  • When you don’t want to pay premiums, but still want the policy to run
What is the Surrender Value option?

Under this option, you close the policy and take your money back. The money that you’ll receive will be some percentage of your premiums paid minus the first year premium, and this percentage increases according to the number of years the policy premium has been paid. A policy only provides surrender value after 3 years of premium payment; this means that if you choose to end your policy before 3 years, you will end up receiving nothing. The surrender value starts with 30% and can go up accordingly.

Surrendering a policy is suggested when:

  • When remaining number of years in policy is more than 8-10 yrs
  • You need money for some reason
  • You are not able to pay the premiums