When you purchased an insurance protection plan which isn't working according to your financial plan and you are wanting to end the strategy in that case you have an option to surrender your policy. Let’s understand this more detail below:
Surrender Value vs Paid-up Value of Life Insurance Policy:
Surrendering is useful firstly with regards to time value of cash and secondly when people require immediate cash in-case of emergency. In the event that the Surrender Value when contributed somewhere else acquires intensified interest, it can outperform the Paid-up Value payable on Maturity. Let’s take surrender value example: an insurance policy with a paid-up value of Rs.8,00,000 has a surrender value of say Rs.3,60,000 (45% of Paid-up Value). Whenever you invest at a compound rate of 12% in mutual funds, the cash value becoming Rs.9,00,000 roughly in around 8 years which is higher than continuing an Insurance policy for another 8 years under the paid-up option.
Paid-up Value vs Surrender Value of Life Insurance Policy:
Paid-up is better when you want life insurance coverage should continue as it is even after premium installment has been stopped. In this event whenever you go out to purchase another insurance policy, then your premium amount will be higher. In this case, continuing insurance policy can be the better option. Let’s take a paid-up value example: If you have bought your life term insurance policy for 25 years with a sum assured value of Rs. 2 crores. If you have paid the premium for 5 years and you wish you stop paying premiums now then in that case, your sum assured will be reduced to Rs. 40 lakhs based on premium paid.
In conclusion, both surrender value and paid-up value of a life insurance policy have its own advantages and disadvantages. It purely depends upon individual choice regarding which way he want to continue according to his / her financial plans.