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Saturday, January 26, 2013

What is a paid up life insurance policy?

I have seen many people who buy life insurance policies and start paying premiums only to realize after a few years that they need to continue to pay the premium for another 20 years or in some cases, even throughout their lifetimes. After 3-4 years, they seem to be running out of finances to continue to pay regular premiums for the policy to stay in effect. Do not lose heart. Insurance industry provides a provision in such cases.

If you take it literally, a paid up policy is a policy where life insurance is paid up and you don't have to pay any more premiums.

What is Paid-up insurance?
Paid-up insurance is a non-forfeiture option in many life insurance policies, meaning that there is a reduced amount of the death benefit that your beneficiary can receive from the policy even if you stop making premium payments. The term "paid up" in life insurance really mean that you have built enough cash value where you don't have to pay your premiums for a while or not at all.
The catch is that your life insurance is still enforced and someone has to pay the annual premiums. So the insurance company takes money from your cash value to pay for it. If you die someday, your family will get the death benefit MINUS whatever cash value was taken (including the interest charged on the cash value).

What is a Paid Up Value?
Since the insurance company starts paying your premiums from your built up cash, your Sum Assured of the policy is reduced in proportionate with the number of premiums paid and total number of premiums of the policy. A Paid Up Policy acquires a Paid Up Value. If a policy needs to be surrendered or a loan needs to be availed, it is taken as a percentage of the Paid Up Value.

Let us understand this with an example:

If the Policy Term is 25 years and the Sum Assured is Rs 20,00,000 and the person has paid premiums for 5 years, then the Paid Up Value of this policy will automatically be reduced to the Sum Assured of Rs 4,00,000 based on the below calculations:

Paid-Up Value = [ (No. of paid premium X Sum Assured) / Total No. of premium ]

Hence, Paid Up Value = [ (5X2000000)/25) <No Accrued Bonus> = Rs 4,00,000

Other provisions in a Paid Up policy
1) The insurance cover will continue till the end of the regular term or death of the policyholder, whichever is earlier.
2) The insurance cover will be Paid-Upto the reduced sum assured or the Paid-Up Value.
3) The Paid-Up policy is also eligible to receive the proportionate bonus.
4) Paid-Up Policies can further be surrendered if the policyholder wishes to take the money out. In that case, a certain surrender charge is deducted, depending on the tenure left for the policy to mature and the remaining amount can be paid out to the policyholder as Surrender Value.
5) Even loans can be availed on Paid-Up Policies. If the loan amount is not paid back, then the Paid-Up Policy can be surrendered by the insurer to recover the loan amount.

So, instead of cancelling your life insurance policy or leaving it unattended, make sure that you read the terms and conditions of your policy document and find out when does the policy become eligible to be a paid up policy. If the duration is not too far off, then continue to pay the premiums at least till that time and keep enjoying life cover, albeit less than what you planned. 

Something is definitely better than nothing.


Manoj Arora
elevate your life...

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  1. AS early as now I already get my self a life insurance so as not to give my left family a problem.

  2. Thanks for sharing your thoughts. I truly appreciate your efforts and I will be waiting for your next write ups thanks
    once again.

  3. Once the policy is automatically moved to 'Fully-Paid up' status, is it not possible to surrender the policy? Pl advise.

    1. Dear Karthik,
      You can surrender the policy even after you have made it fully paid up. There are no such restrictions. However, it will be better to check with your insurance provider once.

  4. I'm having doubt after paid up for 5 years and then surrender then how much amount I would get my policy details term 10 years paid for 3 years premium is 680000. Amount is 99000 ..

    1. The surrender value is mostly as per the terms of the policy. Suggest please visit the local office of your insurance provider. They can instantly provide you with exact calculations.
      Manoj Arora