When you do not wish to pay any further premium but wish to remain invested in the life insurance plan, there is an option called “Paid Up”, which you can avail of.
A paid-up insurance policy can be described as a life insurance policy that has been paid up in full and is in force. So, the policy continues but with reduced benefits as subsequent premiums have not been paid. So, there are no premiums to be paid, and the policy is valid till maturity or the death of the policyholder, as the case may be.
A life insurance policy is a long-term plan where premiums are to be paid for a long time during the policy tenure. But sometimes, when a policyholder is unable to pay premiums but does not want to close the policy, the sum assured can be reduced in proportion to the premiums paid and is called the paid-up value. However, there are certain conditions to follow before converting to a paid-up insurance policy.
How Does a Paid-Up Policy Work?
Many insurers offer a paid-up policy to keep the policy in force even if the policyholder cannot pay premiums, provided the policy has acquired a surrender value. However, there are certain conditions that need to be fulfilled to acquire a paid-up value.
- Premiums need to be paid for at least 2 years for a policy with less than 10 years of coverage.
- Premiums need to be paid for at least 3 years for a policy with more than 10 years of coverage.
- No profits or bonuses are added to the sum assured if a policy becomes a paid-up policy.
- The riders added to your policy do not acquire any paid-up value.
- For ULIPs, a paid-up value can be acquired only after the lock-in period.
The paid-up value can be calculated using the following formula:
Paid-Up Value = Sum Assured (No. of premiums paid/No. Of premiums Payable)
Let us understand this with the help of an example: Your policy has a sum assured of Rs. 5 lakhs and you pay the premium annually, which is payable till 20 years. After 10 premium payments, if you are unable to pay any premium, then the paid-up value will be calculated as:
Paid-Up Value = 5,00,000 * 10/20 = 2,50,000/-
If you do not want to continue with your insurance policy because of low coverage and low returns, you can surrender the policy after 3 years of paying premiums and take your money. The surrender value that you receive is a certain percentage of the premiums paid minus the first year premium. The surrender value ranges from 30% to 90% of the premiums paid depending on the time of surrender, starting from after 3rd year upto the last 2 years to policy maturity. This percentage varies from insurer to insurer. You can find the details about your policy in the policy document.
Paid-Up Vs Surrender
A paid-up option is suggested either when your policy is nearing its maturity or you don’t need money immediately but are unable to pay the premium. On the other hand, a surrender option is good when you are in urgent need of money, or there are more than 8 to 10 years left for your policy to get matured so that you can utilise the money in better investments.
Advantages of a Paid-Up Policy
- There are a number of benefits that you can get from a paid-up policy even if the sum assured is reduced.
- You still have the insurance coverage, and your family will get a sum assured in case you die within the policy term because buying a new policy at an advanced age will have higher premiums.
- Any bonuses accrued till the premiums were paid still attached to the paid-up value.
- Loan benefits are also available once the policy acquires a surrender value.
- You can get the paid-up value paid in instalments during claim settlement.
Before you decide to convert your policy into a paid-up policy, go through the policy wordings. Also, check with your insurer before buying life insurance whether there is a paid-up option or not. It is always good to stay covered even if the sum assured is reduced rather than closing a policy and looking for new plans later.