Surrender Value in Insurance: Meaning, Calculation & Key Considerations

What is Surrender Value in Insurance?

In insurance, ‘surrender’ means ending your life insurance policy before maturity. You stop paying premiums. The insurer pays you a surrender value — usually part of the premiums you’ve paid — after deducting charges.

It is important to know that not all insurance policies have a surrender value. For example, term insurance plans in the UAE don’t have any surrender value. These plans give only financial protection, not savings. Policies like whole life, endowment, or investment-linked insurance usually offer this option.

Types of Insurance Surrender Value 

Insurance companies in the UAE use two main ways to calculate surrender value in life insurance —

Guaranteed Surrender Value

The guaranteed surrender value is the amount your insurance company promises to give you when you cancel your policy after paying premiums for a minimum number of years (2-3 years; can vary).

• It is a fixed percentage of the premiums you have already paid, excluding the first-year premium and any extra charges
• The exact percentage depends on your insurance company and the terms mentioned in your policy
• Since this value is ‘guaranteed’, you know exactly what you’ll get, no matter the market conditions

Example: Fatima pays AED 4,000 per year for her life insurance. Her policy says she will get 25% of the total premiums paid (except the first year) as surrender value after 5 years.

• She paid for 5 years = AED 20,000
• First-year premium excluded = AED 16,000
• 25% of AED 16,000 = AED 4,000

So, if Fatima surrenders her policy after 5 years, she will get AED 4,000.

Special Surrender Value

The special surrender value is more flexible. It can sometimes be higher than the guaranteed value. Unlike GSV, it is not fixed. Instead, it depends on —

• How many years have you paid your premiums
• The paid-up value (a reduced sum assured based on the premiums paid)
• Any bonuses declared on the policy
• The surrender factor set by the insurance company (varies with policy duration)

Insurance companies in the UAE use a formula to calculate this —

SSV = (Paid-up Value + Bonuses) × Surrender Factor

Example: Asif pays AED 6,000 per year for 7 years in a 20-year policy with a sum assured of AED 120,000.

• Paid-up value = AED 120,000 × (7/20) = AED 42,000
• Suppose the insurer’s surrender factor after 7 years = 40%
• No bonus applicable

So, SSV = 42,000 × 40% = AED 16,800

That means if Asif cancels after 7 years, he will receive AED 16,800.

Note: The amounts and percentages are for reference only.

✅ Quick Difference

• GSV: Fixed and guaranteed, calculated as a percentage of premiums
• SSV: Flexible and depends on policy term, bonuses, and surrender factor, often higher than GSV

Which Insurance Policies Offer Surrender Value?

Whether you are eligible or not depends on the type of life insurance policy you hold —

Note: Even within permanent plans, the actual payout depends on premium history, policy duration, and bonuses earned.

How to Calculate Surrender Value in Life Insurance?

The surrender value insurance payout differs across insurers but generally depends on —

• Policy term: Longer terms increase the surrender value
• Premiums paid: Higher total premiums build a larger value
• Age of policyholder: Younger policyholders tend to receive a higher value at surrender
• Accumulated bonuses: Reversionary and terminal bonuses boost payout
• Market performance: For ULIPs, fund performance directly impacts insurance surrender value
• Surrender charges: Deductions by insurers reduce the payout, especially in the first few years

Factors to Consider Before Surrendering a Life Insurance Policy

Surrendering provides liquidity, but it also means giving up life cover. Before taking this step, evaluate —

Future Financial Goals

Your life insurance policy is often closely tied to your broader financial goals, such as retirement planning, debt repayment, or creating a financial cushion for your family. Surrendering your policy means you will no longer have this safety net. Ask yourself:

• Will I have enough financial protection for my dependents without this policy?
• Could losing this coverage derail my retirement or wealth-building plans?
• Am I prioritising short-term needs over long-term stability?

If your family still depends on your financial support, surrendering may not be the best option.

Understanding the Surrender Value

The surrender value is usually lower than the total premiums paid, especially in the early years. For example —

• In the first few years, the surrender value can be minimal since insurers deduct charges
• Over time, as the policy accumulates bonuses and cash value, the surrender value may increase

Before making a decision, use an insurance surrender value calculator or request a surrender value quotation from your insurer. This will give you clarity on how much money you will actually receive.

Exploring Alternative Options

Surrendering is not the only way to ease financial pressure. Many policies provide alternative features, such as —

• Making the policy paid-up: Stop paying premiums but retain reduced coverage
• Taking a policy loan: Borrow against the policy’s surrender value instead of losing coverage
• Partial withdrawals (for ULIPs): Access a portion of your funds without fully surrendering

Exploring these alternatives could help you meet financial needs without entirely giving up your life cover.

Policy Flexibility

Some insurers offer flexible options that allow temporary relief without surrendering. These may include —

• Premium holidays: Skipping payments for a limited time
• Reduced sum assured: Lowering your coverage (and premium) to make it more affordable

Always review your policy terms to check if such options are available before surrendering.

Health Considerations

Your current health plays a major role in whether you can replace your policy later. If you are young and healthy, buying a new policy may be feasible. However:

• If your health has deteriorated, getting new coverage may be difficult or expensive
• Surrendering without having an alternative in place could leave you uninsured

It’s wise to secure new coverage before surrendering an old policy, especially if your health condition has changed.

Seeking Professional Financial Advice

Life insurance is deeply personal, and no two situations are the same. It’s actually a good idea to connect with an expert. A financial advisor can —

• Help you weigh the pros and cons of surrendering
• Suggest alternatives such as loans or paid-up policies
• Align your insurance decisions with your overall financial strategy

Getting personalised guidance ensures that you don’t take a step that might harm your long-term security.

Common Reasons Policyholders Surrender Their Policy

Despite the drawbacks, many policyholders choose to surrender their life insurance policies. Here are the most common reasons —

Switching to a Better Policy

Financial goals evolve over time. You may get a policy with higher coverage, better riders (like critical illness cover), or attractive bonuses. In such cases, policyholders sometimes surrender their existing policy and reinvest the surrender value into a new plan. This makes sense if the benefits of the new policy outweigh the costs of surrender.

Inability to Afford Premiums

Unexpected life events, such as job loss, medical emergencies, or rising living costs, can make premium payments unaffordable. Instead of lapsing the policy, some people choose to surrender it. This way, they free themselves from financial strain.

Urgent Need for Cash

Surrendering is often driven by the need for liquidity. People may use the insurance surrender value to pay off debts, fund education, cover medical emergencies, or invest. For many, this becomes the most practical option when no other liquid assets are available.

Changing Financial Priorities

As life progresses, your financial goals may shift. For instance:

• Parents may prioritise children’s education over long-term coverage
• Retirees may find they no longer need large coverage if dependents are financially independent

Reassessing your priorities may lead to surrendering if the policy no longer fits your needs.

Factors Influencing Surrender Value in Life Insurance

The insurance surrender value depends on multiple variables, including —

• Type of Policy: Endowment and whole life policies often build cash value, whereas term insurance does not
• Duration Held: The longer you hold the policy, the higher the accumulated value
• Bonuses Declared: Regular bonuses from insurers add to the value
• Premium Amount: Higher premiums often translate to higher surrender values
• Age of Entry: Policies purchased at a younger age generally build higher surrender values over time
• Market Conditions: For ULIPs and market-linked plans, surrender value is tied to investment performance
• Surrender Charges: Deduction by the insurer can significantly reduce payouts
• Timing: Surrendering too early almost always results in a financial loss

When is the Right Time to Surrender Your Policy?

The best time depends on your financial position and goals. Generally, surrendering makes sense —

• After the lock-in period (usually 2–3 years), when some value has accumulated
• When premiums are no longer sustainable
• If the policy no longer aligns with your financial strategy
• When urgent liquidity is required and no other sources are available

However, surrendering too early (before bonuses or maturity benefits accumulate) often results in significant loss.

Is Surrendering a Policy a Good Idea?

Tip: Always compare alternatives before surrendering. A policy loan or making the policy paid-up may be better options.

Wrapping Up — Should You Surrender Your Policy?

Surrendering a life insurance policy can provide quick liquidity. However, it comes at the cost of losing life cover and often receiving less than the premiums paid. The surrender value in insurance depends on policy type, duration, bonuses, and applicable charges.

Before surrendering, compare alternatives such as policy loans, partial withdrawals (in ULIPs), or converting to a paid-up policy. Most importantly, ensure the decision aligns with your long-term financial goals and your family’s protection needs.

FAQs on Surrender Value in Insurance