How To Calculate Your Term Insurance Surrender Value, And Things To Keep In Mind Before Surrendering


Understanding the intricacies of term insurance, especially the surrender value, is crucial for policyholders. This guide is designed to simplify these complexities, providing you with a straightforward approach to calculating your term insurance surrender value and outlining essential considerations before making the decision to surrender your policy.

Understanding term insurance surrender value

Understanding the concept of surrender value is essential for anyone navigating the insurance landscape, particularly in the context of term insurance in India. The surrender value is the amount paid to the policyholder by the insurance company if the policyholder decides to terminate the policy before its maturity date. This concept is particularly relevant for term insurance policies that come with a Return of Premium (ROP) feature.

Traditional term insurance vs. ROP term insurance

Traditional term insurance policies in India are straightforward: they offer life coverage for a specified term without any investment component or cash value accumulation. If the policyholder survives the policy term, there is no payout at the end of the term. Consequently, these policies do not offer a surrender value because there’s nothing to ‘surrender’—the policy simply provides coverage with no savings or cash value component.

On the other hand, term insurance with a Return of Premium feature is designed differently. While it serves the primary purpose of providing life coverage, it also promises to return the premiums paid at the end of the policy term if the insured survives the policy duration. This addition of a savings component means that if a policyholder decides to terminate the policy prematurely, there is a sum of money that has been accumulated in terms of premiums paid, which the policyholder is entitled to receive. This sum is known as the surrender value.

Why do companies provide a surrender value?

  1. Incentive for policyholders: The surrender value acts as an incentive for individuals to invest in ROP term insurance policies. Knowing that they can recover a portion of their investment if they need to cancel the policy before its term ends, can make the proposition more attractive.
  2. Financial flexibility: Life circumstances change, and financial flexibility is crucial for policyholders. By offering a surrender value, insurance companies provide an option for policyholders who may need to access funds due to unforeseen financial needs.
  3. Encourages long-term commitment: While the option to surrender offers flexibility, the structure of surrender value also encourages policyholders to maintain their policies for longer periods. Typically, the surrender value increases the longer the policy is held, incentivising policyholders to stick with their policies to maximise the return.
  4. Competitive edge: In a market flooded with various insurance products, offering term insurance plans with an ROP feature and a surrender value can give insurance companies a competitive edge. It addresses a wider range of customer needs and preferences, appealing to those who seek both protection and savings.
  5. Risk management: From the insurer’s perspective, surrender values are also a way to manage risk and ensure policyholder retention. By offering a part of the premiums back as surrender value, insurers mitigate the risk of early policy terminations, ensuring a more stable customer base.

Calculating the surrender value

The calculation of surrender value for term insurance plans with an ROP feature can differ from one insurer to another. Generally, it’s a fraction of the premiums paid minus any applicable fees or charges. The formula looks something like this:

Surrender Value = (Total Premiums Paid − Taxes and Charges) × Surrender Value Factor

The “Surrender Value Factor” is a percentage that can increase the longer the policy has been in force.

Imagine you have been paying an annual premium of ₹20,000 for a term insurance plan with an ROP feature for 5 years. The surrender value factor at this tenure might be around 50%. Assuming taxes and charges sum up to ₹2,000, your calculation would be:

Surrender Value = (₹20,000×5 − ₹2,000) × 50% = ₹49,000

This is a simplified example to help you understand the basic calculation method. The actual surrender value will depend on the specific terms of your insurance policy.

Key considerations before surrendering

  1. Coverage loss: The primary reason to buy term insurance is to ensure your family’s financial security in your absence. Surrendering your policy means you lose this protection.
  2. Surrender charges: There might be fees associated with surrendering your policy early, which can reduce the surrender value you receive.
  3. Explore alternatives: Before surrendering, look into alternatives like loan against policy (if available) or reducing the sum assured to make premiums more manageable.
  4. Tax implications: In India, the surrender value received may have tax implications. Consulting with a tax advisor is advisable to understand your tax liability.
  5. Reassess your needs: Life circumstances change, and so do your insurance needs. Evaluate your current financial situation and insurance requirements before making a decision.
  6. Use term insurance calculators: When comparing different term insurance plans, a term insurance calculator is an invaluable tool. It helps estimate premiums based on your age, coverage amount, term length, and other factors, allowing for an informed decision-making process.


Surrendering a term insurance policy is a decision that requires careful consideration, where financial security and family protection are paramount. By understanding how to calculate the surrender value and considering all relevant factors, you can make an informed decision.

Always seek advice from financial advisors or insurance experts to explore all options and ensure that your decision aligns with your long-term financial goals.

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