We often experience tough times and money crunches where one must arrange for immediate financial help. Right from utilising your emergency fund to withdrawing from your financial backup saved up for the future, you need to decide which shall be less detrimental. Another option is liquidating your investments, especially an insurance policy which comes with a surrender value. So, today let’s understand what is surrender value and how is it estimated.
What Is Surrender Value in ULIP?
Every insurance policy gets a surrender value after a specific amount of time. So, the surrender value in simple terms is the sum that insurance providers must pay to the policyholder if the plan is terminated before maturity. Such a value keeps changing as the tenure of your policy increases. Thus, if one’s insurance requirements have changed or in case of a financial emergency, many individuals surrender their plans for a lump sum benefit. Now, let’s understand how surrender charges are applicable in ULIP policies:
- Before the lock-in period is over – If you exit your ULIP policy before the lock-in period of five years is over, you will have to pay some charges. The insurer will charge a discontinuation fee before paying out the surrender value.
- After the lock-in period is over – If you discontinue the insurance plan after completion of the lock-in period then there are no charges applicable.
Calculating ULIP Surrender Value:
- Mortality Charges
In ULIP, the mortality charge is a fee that policyholders must pay to secure a life cover. This amount is calculated based on numerous factors such as your age, gender, health, etc. The mortality charges are directly deducted from your premium once per month. So, to estimate the surrender value of your Unit-Linked Insurance Plan, first, the mortality charge needs to be calculated. Once the contract of the policy ends, the insurer shall subtract any pending expenses and the value of your plan will be paid out to you.
- Fund Management Charges
You pay this amount to the insurer for managing your ULIP funds. According to the IRDAI, the management charge should not be more than 1.35% of your fund value per annum. Also, the charges applicable are estimated based on the fund value, before determining the Net Asset Value (NAV). Thus, to calculate the surrender value of your ULIP policy, you must consider the fund management fees as well.
- ULIP Policy Tenure
The number of years of regular premium payment reflects the fund value of your ULIP policy. So, the higher the number of premiums paid, more shall be the value of your policy unless you have made any partial withdrawals. Therefore, by deducting the fund management charges and mortality fees, you can roughly determine the surrender value of your plan. However, the ratio of investment is another factor that will decide the corpus you shall get on discontinuing the policy.
- Ratio of Investment to Insurance
The last step in estimating the surrender value of your Unit-Linked Insurance Plan is, understanding the insurance to investment ratio. This value decides the allocation of your premium, which is split into life cover and investment. By determining the ratio of investment to insurance in ULIP, you can find out how much the total fund value is. On considering all four factors, you can finally estimate the surrender value of the ULIP policy.
With the above pointers, you are now aware of what is ULIP surrender value and how it is estimated based on various factors. If you haven’t bought a ULIP policy yet, get one today to earn lucrative returns. To learn how many returns you can gain from your investment, make use of the ULIP calculator available online!
