₹1 crore life insurance policy: Thinking of exiting before maturity? Check your surrender value before you take decision

A ₹1 crore life insurance policy may provide substantial financial protection to your family, but surrendering it before maturity could mean losing a significant portion of the premiums already paid. In some cases, policyholders may not receive any money at all.

Whether you are surrendering a policy because of financial difficulties, high premiums or changing insurance needs, the amount you recover depends on the type of policy, how long you have held it and the premiums paid. While some insurance products allow policyholders to recover part of their investment, others offer no surrender benefit.

According to Prerak Parmar, Chief Growth Officer at Bharti AXA Life Insurance, the surrender value of a ₹1 crore policy depends entirely on the underlying insurance product.

Surrender value of a ₹1 crore life insurance policy depends on the type of plan

The first thing policyholders need to understand is that the ₹1 crore sum assured does not determine the surrender value. The amount payable depends on whether the policy is a term insurance plan, a unit-linked insurance plan (ULIP) or a traditional savings-oriented insurance product.

For a pure term insurance policy, the surrender value is typically zero. This means a policyholder who stops paying premiums and exits a regular-premium term plan generally cannot recover the premiums already paid.

“For a pure term insurance plan, the surrender value is typically zero,” Parmar said.

However, certain term insurance products, such as return-of-premium plans, may have different surrender provisions.

For ULIPs, the amount payable depends on the market value of the investment units. These policies have a mandatory five-year lock-in period, after which policyholders can surrender the policy and receive the prevailing fund value.

Traditional participating and non-participating insurance products operate differently.

Parmar explained that these products provide surrender benefits based on regulatory requirements and the policy’s structure.

He said the guaranteed surrender value can range from 30% to 90% of the relevant premiums paid, depending on factors such as the number of premiums paid, the total premiums payable and the year of surrender.

However, these percentages should not be treated as a universal payout formula. The applicable guaranteed surrender value, special surrender value and exclusions specified in the policy determine the actual amount payable.

Surrendering a policy after 3, 5 or 10 years can lead to significant losses

Consider someone who purchases a ₹1 crore life insurance policy with an annual premium of ₹1 lakh and a premium payment term of 20 years.

If the policyholder decides to surrender the policy after three years, they would have paid ₹3 lakh in premiums. After five years, the total premium outgo would be ₹5 lakh, while after 10 years, it would reach ₹10 lakh.

The amount recovered would depend on the product.

For a regular-premium pure term insurance policy, surrendering after three, five or 10 years would generally result in no payout. Consequently, the policyholder would lose the entire ₹3 lakh, ₹5 lakh or ₹10 lakh paid in premiums.

For a ULIP, the situation is different. A policyholder who exits after completing the five-year lock-in period receives the prevailing fund value, which depends on investment performance and applicable charges.

Therefore, someone who has paid ₹5 lakh over five years may receive more or less than the premiums paid, depending on market movements and deductions.

In traditional participating and non-participating plans, the surrender value is calculated using the applicable policy provisions.

Parmar said that the financial impact of surrendering after three, five or 10 years varies significantly depending on the product.

Importantly, the ₹1 crore life cover does not mean that the policyholder will receive ₹1 crore on surrender. The sum assured is primarily the benefit payable upon the insured event, subject to the policy terms.

Premiums paid, policy duration and benefits determine the surrender value

According to Parmar, surrender value calculations consider the unused portion of the risk premium and the savings component accumulated under the policy.

The objective is to return an appropriate proportion of the value built up in the policy, taking into account its structure and benefits.

Several factors influence the calculation, including the premium payment term, overall policy duration, survival benefits already paid or payable, and the nature of the death and maturity benefits.

For participating policies, accumulated bonuses may also influence the surrender amount, subject to the policy terms.

This explains why two policyholders with the same ₹1 crore life cover and similar annual premiums may receive substantially different surrender values.

IRDAI’s revised surrender rules offer higher payouts for early exits from traditional plans

The Insurance Regulatory and Development Authority of India (IRDAI) revised surrender value requirements for traditional life insurance products, with changes taking effect from October 1, 2024.

The changes were intended to improve surrender benefits, particularly for policyholders exiting certain traditional insurance products during the early years.

Parmar said the revised regulations primarily affect participating and non-participating traditional insurance products.

“The revised regulations have no impact on the surrender values for ULIPs and term plans,” he said.

He explained that the changes particularly target early exits during the first two years by increasing the surrender value payable in the short term, while long-term surrender values remain largely unchanged.

According to Parmar, the regulatory changes are intended to improve fairness for customers exiting early, reduce upfront distribution costs and encourage policyholders to continue paying premiums over the long term.

However, the revised rules do not guarantee that policyholders will recover all the premiums paid.

For someone considering surrendering a policy, the key figure is the actual surrender value quoted by the insurer, rather than the original sum assured.

Policyholders can compare this amount with their total premiums paid to understand the financial loss involved. They should also check whether surrendering the policy would terminate their existing life insurance protection.

Ultimately, a ₹1 crore life insurance policy may provide substantial protection during its term, but surrendering it early can produce a significantly smaller payout, or none at all, depending on the product.