Everyone knows that a life insurance policy is a must, but not many are sure which is the right plan to purchase. There may be times when you have purchased a wrong insurance policy and want to return it before maturity. This is known as surrendering your policy – terminating it before maturity. 

So, does that mean – you have to forfeit the premiums you have paid to date? No, you are eligible to receive the surrender value from your life insurer. The insurer deducts a value known as the surrender fee and pays the remaining amount. The value you receive depends on several factors – like plan type, premiums paid, date of surrender, etc.

In this post, we take a closer look at surrender value and help you understand how it is calculated for your plan. 

What is the surrender value of a life insurance plan? 

Surrender value is the amount you get from the insurer when you terminate a life insurance policy before its maturity. Generally, the surrender value of the plan is based on the savings and earnings accumulated in the plan to date. 

Most insurers deduct a nominal fee (the surrender charge) and pay the remaining amount. As per a recent IRDAI (Insurance Regulatory and Development Authority of India) directive, insurers should NOT levy a surrender fee on policies terminated five years after commencement. 

Key Points to Know about Surrender Value 

  • The surrender value varies from one policy to another. Based on the policy type, the earnings and savings accumulated in the policy on the surrender date.
  • Some policies do not offer any surrender value. 
  • Failing to pay the policy premiums on time causes you to lose the surrender value. 
  • Terminating the policy before maturity fetches you the surrender value, but you lose the plan's benefits, including life coverage. 
  • The policy ceases to exist once you surrender it. 

How is the surrender value of an insurance policy calculated? 

  • Guaranteed Surrender Value 

This is the value that the policyholder gets when he/she surrenders the plan after three years of policy inception. Generally, the guaranteed surrender value stands at 30% of the premiums paid to date. It excludes the premium costs paid for the first year, bonuses received, and other additional charges. 

Let's calculate the guaranteed surrender value for a sample plan. Let's say you pay an annual premium of Rs. 10,000 for three years. The surrender value you get at the end of three years is 30% of the second-and third-year premiums, excluding the premium for the first year. In this case, it is 30% of Rs. 20,000, which is Rs. 6,000. 

  • Special Surrender Value 

When you surrender a policy for which you have not paid premiums on time, you get special surrender value. 

Before we look at special surrender value, we need to understand another insurance term – the paid-up value. Assume that the policyholder stops paying premiums after a certain period. In this case, the coverage offered by the policy continues albeit at a lower sum assured. This lower sum assured is known as paid-up value. 

The special surrender value is calculated using the formula, 

(Paid-up value + bonuses if any) * surrender value factor

The paid-up value can be calculated using the formula = basic sum assured * (number of premiums paid/number of premiums payable)

Let's explain with an example how the special surrender value is calculated. Let's assume you have taken a life insurance policy with a sum assured of Rs. 3 lakhs for a tenure of 20 years. The annual premiums for the plan are Rs. 15,000. Let's suppose you stopped paying the premium after the fourth year. The accrued bonuses on the policy amount to Rs. 30,000, and the surrender value factor is 30%. 

Then, the paid-up value = 3,00,000 x (4/20) = Rs. 60,000

Then, the special surrender value = (60,000 + 30,000) x 30% = Rs. 27,000

How is the surrender value determined for different types of insurance policies? 

  • For whole life insurance policies 

For whole life plans, you are guaranteed the cash value at the time of policy surrender. However, note that if you need cash but don't want to surrender the plan, 

  • You can take a loan against the policy
  • Or withdraw a part of the cash value 

The loans offered against whole life plans come with low interest rates and are generally tax-free. However, note that you have to repay the loan on time, or else you risk reducing the death benefits offered. 

  • For term life insurance policies 

Term plans do not have any cash value. So, when you surrender it, you do not receive any surrender value from it. The policy coverage ceases to exist on terminating the plan. 

How to surrender a life insurance policy? 

To surrender a plan, you need to reach out to your insurer. Connect with the customer care team of the insurance company to find the applicable surrender charges and the current surrender value of the plan. If you decide to go ahead with policy termination, then you will have to provide the following documents:

  • The surrender request form along with all necessary details like policy number, policyholder's name, email address and mobile number. 
  • Original policy documents. 
  • Bank account details for the surrender value to be deposited. 
  • Other KYC documents as needed by the insurer. 

Final Thoughts – To Surrender or Not? 

Surrendering a life insurance plan means you are cancelling the coverage and benefits offered by the plan. To decide if it's the right choice, make sure to weigh the benefits provided by the policy against the cash you get when you surrender it. 

It's a good idea to surrender the plan, if:

  • The coverage and benefits offered by the plan do not suit your needs. 
  • If the amount you invest in it can get you better returns elsewhere. 

It's not a good idea to surrender the plan, if:

  • You are looking for cash to meet emergency needs. If this is the case, explore alternative funding choices like loans against the plan, online loans, etc. 

Finally, before you surrender the plan, calculate the costs of surrendering to decide if it’s the right choice for you. 


  1. What is the free-look period? 

The free-look period is the period offered to policyholders during which the policy can be terminated without any penalties. Suppose you find that the policy's terms and conditions do not suit you. In that case, you can close the policy during the free-look period without any charges. Generally, the free-look period is offered 30 to 45 days from policy commencement. The insurer reimburses the premiums you have paid to date after deducting minor administration charges. 

  1. How to avoid paying surrender fees? 

You can avoid the surrender penalty by holding the plan until the end of the specified period. Post this period, you can surrender the plan at any time without any penalties. You can find this period mentioned in the original policy prospectus. 

  1. What is the difference between cash value and surrender value? 

The cash value is the amount accrued in the policy at a specific time. The surrender value is usually the cash value of the policy minus the surrender penalty and other charges. 

  1. How much will I receive if I surrender my life insurance policy?

The amount depends on the policy type and how many premiums you have paid to date. You can calculate the surrender amount using the formulas given above or by referring to your policy document. 

  1. Do I have to pay taxes on the surrender value received? 

In most cases, you don’t have to pay any tax on the cash value received when you surrender a plan.