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Surrendering policy Vs Reduced paid-up option: Which is better?


If you have a return of premium or whole life insurance policy and don’t want to pay premiums for convincing reasons, you can either surrender your policy and take the cash value or use the accrued cash value to get reduced paid-up insurance coverage. However, when you opt for a reduced paid-up life insurance policy, the insurer reduces the death benefit to the accrued cash value you had in your life insurance policy.

How it works: Reduced paid-up life insurance option offers a substitute for surrendering the policy. When you buy a life insurance policy and cannot pay further premiums, you can surrender the policy and withdraw the cash value and use that money for yourself. However, when you surrender the policy, the death benefit is eliminated. So, in case of a mishap, your nominees don’t get the death benefit.

With a reduced paid-up option, you can use the cash value to convert to a paid-up policy with a smaller death benefit. In such a case, you will not have to pay additional premiums since the policy gets paid up. Venkatesh Naidu, CEO of Bajaj Capital Insurance Broking Ltd, said, “When you choose the reduced paid-up insurance option, insurers adjust the death benefit to cover the accumulated cash value.”

“The reduced paid-up life insurance is a non-forfeiture policy option available to policyholders who have a return of premium variant or a whole life variant of the policies,” said Rhishabh Garg, Head of Term Insurance, “A policyholder can exercise this feature once the policy has acquired a surrender value. However, the availability of this feature may vary across different policies,” Garg said.

How it is calculated: Insurers evaluate reduced paid-up (RPU) value by keeping three factors in account; the number of premiums paid, the number of premiums payable, and the sum assured. Garg said, “Once a policy becomes reduced paid-up, the insurer reduces the sum assured applicable under the death benefit using the proportionate premiums method. RPU Sum Assured = ((Total premiums paid for the base policy plus loadings for modal premiums (if any)) / (Total premiums payable plus loadings for modal premiums (if any))) X sum assured.

Surrendering policy Vs Reduced paid-up option: As mentioned above, by choosing the reduced paid-up option, your life insurance coverage continues even after you stop paying premiums. However, choosing to surrender the policy would mean that all the past paid premiums would get forfeited, and your policy life cover would end.

“If you want to curb your expenses but still want to retain your life insurance policy, then the reduced paid-up option is good for you instead of surrendering the policy. This way, your beneficiaries will have an assurance that they will get death benefits in your absence. Reduced paid-up option will also help to avoid surrender charges,” said Naidu.

Rakesh Goyal, Director, Probus Insurance Broker, said, “You shouldn’t give up on your life coverage that your insurer is ready to give you if you opt for a reduced paid-up option. Buying a new policy instead may result in higher premiums than your old policy.”

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