Under current IRDAI rules, non-linked savings-oriented life insurance policies can have surrender value, while pure risk products such as regular term insurance are generally excluded because they do not build maturity value. When a policyholder closes a life insurance policy before maturity, the insurer may pay an amount known as the surrender value. For traditional policies, there are generally two important values — Guaranteed Surrender Value (GSV) and Special Surrender Value (SSV). The amount payable depends on the policy terms, and where applicable, the policyholder can receive the higher value.
Under IRDAI's 2024 regulations, the minimum GSV for regular-premium policies is generally 30% of total premiums paid if the policy is surrendered during the second year. It rises to 35% in the third year and 50% if the policy is surrendered between the fourth and seventh policy years. The calculation deducts any survival benefits already paid. The actual surrender value may be higher because insurers also calculate Special Surrender Value, and there may be bonuses or guaranteed additions depending on the policy.
Traditional insurance policies are designed as long-term products, and their premiums cover several components including insurance protection, expenses, and benefits that may build over many years. This is why surrendering early may not allow a policyholder to recover everything that has already been paid. Special Surrender Value becomes available after completion of the first policy year if one full year's premium has been paid. Guaranteed Surrender Value for regular-premium non-linked policies is acquired after premiums have been paid for at least two consecutive years.
Unit Linked Insurance Plans (ULIPs) work differently from traditional policies. ULIPs have a five-year lock-in period. If a ULIP is surrendered before the five-year lock-in ends, the fund value after applicable discontinuation charges is moved to the Discontinued Policy Fund. The amount is generally paid after completion of the lock-in period rather than immediately.
As retirees move into retirement, life insurance priorities often shift significantly from income replacement during earning years. Children may no longer be financially dependent, major debts like mortgages could be paid off, and retirement income from pensions, Social Security, and investments may be secure enough to support a spouse without insurance. Estate planning, charitable giving, and establishing a legacy become more prominent factors. Retirees should consider whether their current life insurance still fits their changed financial situation and risk protection needs.
