5 important Forms of Payment of Surrender Values

The policy holder can get the surrender values in any of the following forms:

1. Cash Surrender Value

The policyholder can get the value of surrender in cash. When the policyholder gets the cash, the contract comes to an end and the insurer has no further obligation to pay on that particular policy. Since all the amounts surrendered is given at the time of surrender, the cash benefit is generally less than the other benefits. However, the cash surrender value gives immediate relief to the policyholders; so it is generally preferred by them.

2. Reduced Paid up Insurance

In this case, the surrender value is not paid immediately, but the original amount of policy is reduced in certain proportion and the reduced amount is paid according to the term of Policy.

Thus, if, after at least two full years’ premiums have been paid in respect of the policy, any subsequent premium be not duly paid, the policy shall not be wholly void, but the sum assured by it shall be reduced to such a sum as shall bear the same ratio to the full sum assured as the number of premiums actually paid shall bear to the total number premiums payable as originally stipulated for in the policy provided such reduced sum together any attached bonus in the case of a policy for a sum assured of Rs. 1,000 or over be not less than Rs. 100 and in the case of a policy for or a sum assured of less than Rs. 1,000 be not less than Rs. 50.

1. If the premiums under the policies have been paid for a period of five years or 1 /4 of the original premium paying period of the policy whichever is less but subject to the condition that minimum 3 years’ premiums are paid.

2. The paid up value under the policy is not less than Rs. 250 excluding of attached bonuses for policies where under original sum assured is Rs. 1,000 or more and Rs. 100 exclusive of attached bonus where the original sum assured is less than Rs. 1,000.

The above non-forfeiture condition would apply to proposals completed on and after 1 -1 -1976.

3. Extended Term Insurance:

The net cash value arisen at the time of surrender of a policy can be used for payment of as single premium for purchase of term insurance, where the sum assured will be paid only when death of the life assured occurs within the term of the policy. The main disadvantage of this scheme is that if the life assured does not die within the specified time, the premium paid is forfeited by the insurer.

Thus, the surrender value would be lost with no use to the insured. However, in case of death during the term, the policy-holder would be benefited for a higher amount with only a small sum of surrender value. Moreover, the term insurance under this scheme is given without medical examination.

4. Automatic Premium Loan :

Under this scheme, the surrender value is used for payment of future premium. Thus, the policy will continue up to the period the surrender value is adequate enough to meet the amount of further premiums. Each premium is paid automatically as it comes due by creation of a loan which with interest becomes a lien upon the face of the policy amount until paid.

The premiums continue to be paid until the surrender value is completely exhausted. After this period the policy stands cancelled and no amount is paid to the policy-holder because all the surrender value has been used for payment of premiums.

The advantage of this scheme is that if the policyholder dies after surrender but before expiry of the surrender value, full policy amount minus the loan and interest thereon is paid. The policy does not lapse but remains in full force subject to the lien.

The insured is permitted to regain his original status without furnishing an evidence of insurability by simply repaying the amount which he owes to the insurer.

The rate of interest on loan is now 9 per cent p.a. with effect from Feb. 1974. The loan can be granted only up to 90 per cent of surrender value if policy was in force.

5. Purchase of Annuity :

The policyholder, with the surrender value, can purchase an annuity. Thus instead of taking surrender value in cash, the annuity is purchased from the available surrender value.

The amount of annuity depends upon the amount of net cash value, the attained age of the policyholders and the type of annuity required. The option of an annuity is better alternative to those who require using all their savings during their life-times.