Paid-up value of a traditional insurance policy

It is advisable to surrender the policy if you do not want to continue

July 13, 2012 2:43 IST | India Infoline News Service
Besides simple terms like sum assured, premium and tenure, a traditional insurance policy includes many technical words. Let’s understand what does paid-up value of a life insurance policy mean. Paid-up value applies to traditional products such as money back policies, endowment plans and whole life insurance.

Paid-up value is the reduced amount of sum assured paid by the insurance company, in case the policyholder discontinues payment of premiums. After payment of three years of premium in traditional life insurance plans, your policy automatically acquires paid-up value. If you continue to pay further premiums then the paid-up value of your policy increases every year.

If for any reason, you are unable to pay further premiums (after three years of premium payment) then the paid-up value will remain ‘same’ throughout the policy period. If the premiums are discontinued then no further bonus will be added to the policy. The death claim will be restricted to the paid-up value of the policy.

One can continue to hold the policy and get the paid-up value at the end of term or can opt for withdrawal by surrendering the policy. It is advisable to surrender the policy if you do not want to continue. It will give you approximately 6% return per annum on the surrender value if you hold the policy till the end of the tenure.

Let’s take an example: If you have bought a 20-year insurance plan with sum assured of Rs. 2 lakh and you are paying Rs. 10,000 premium annually. You have regularly paid premiums for five years and now you don’t want to pay the premiums for the remaining 15 years. Assume that the total bonus of Rs. 35,000 is credited to your plan for the five years, then the paid-up value after completion of five years will be:

Paid-up value = [(Number of premiums paid / Total premiums payable * Sum assured) + bonus credited till the policy is paid)]

5/20*2,00,000 = Rs. 50,000 + Rs. 35,000 (bonus) 
Paid-up value = Rs. 85,000 and the death claim in this case is restricted to Rs. 85,000 only if you choose to continue the plan without further contribution.

A paid-up policy loses all the additional benefits attached to the policy such as double accident cover and critical illness cover among others. This reduced insurance cover will continue till the end of the term or death of the policyholder, whichever is earlier. The insurance cover will be paid-up to the reduced sum assured or the paid-up value.

It is advisable to separate your insurance and investment need.

Contributed by Pankaaj Maalde—a certified financial planner and head of financial planning at ApnaPaisa.com

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