What do you mean by paid-up value in life insurance

Paid-up value in life insurance refers to the reduced sum assured or coverage amount that a policyholder is entitled to if they stop paying premiums but do not surrender the policy. It allows the policy to continue, albeit with a lower benefit, even if the policyholder discontinues premium payments after a certain period.

Here’s a breakdown of how paid-up value works:

How Paid-Up Value Works

• Applicable to: Paid-up value applies mainly to endowment, whole life, and some ULIP (Unit-Linked Insurance Plans) policies.
• Conditions:
  • You must have paid premiums for a specific number of years (usually 2-3 years, depending on the insurer and the policy terms).
  • The policyholder must choose to stop paying premiums but not surrender the policy.
  • The insurer will convert the policy to its paid-up status, based on the premiums already paid and the length of time you’ve been covered.

What Happens When a Policy Becomes Paid-Up?

• Reduced Coverage: The sum assured (the coverage amount) is reduced, but the policy stays in force.
  • Example: If you had a policy for ₹10 lakh but stopped paying premiums, the insurer might reduce the sum assured to ₹4-5 lakh, depending on the premiums already paid.
• No Further Premiums Required: After the policy is converted to paid-up, you won’t need to pay any more premiums.
• Policy Will Still Pay a Benefit: The policy will still pay a death benefit (reduced sum assured) to your nominee in case of death or maturity, but without requiring further premium payments.
• Bonus Continuation: In some cases, the policy may still be eligible for bonuses, though these will be calculated on the reduced sum assured.

Key Features of Paid-Up Policies

1. Reduced Coverage: The amount of coverage is reduced according to the premiums already paid.
2. No Future Premiums: You don’t have to continue paying premiums, but the policy remains in force.
3. Benefit at Maturity: If the policy reaches its maturity date, the reduced sum assured will be paid out, along with any bonuses or accumulated benefits.
4. Survival Benefits (if applicable): In case of certain policies like endowments or money-back plans, the policyholder may receive the reduced benefits at periodic intervals, though the payouts will be lower.

Example of Paid-Up Value:

Let’s assume you took a 20-year endowment policy with a sum assured of ₹10 lakh and paid premiums for 5 years. If you decide to stop paying premiums at this point, the insurer may convert your policy to a paid-up policy with a reduced sum assured, let’s say ₹4-5 lakh (depending on the insurer’s terms).

• Death Benefit: If you die during the term, the insurer will pay the reduced sum assured of ₹4-5 lakh to your nominee, instead of the original ₹10 lakh.
• Maturity Benefit: At the end of the policy term, you will receive the reduced amount of ₹4-5 lakh, plus any accumulated bonuses (if applicable).

Benefits of Paid-Up Policies

• Maintains Some Coverage: You still have life insurance protection even if you can’t continue paying premiums.
• No Financial Burden: You won’t be burdened by premium payments but still retain some form of insurance coverage.
• Provides Flexibility: It’s an option for policyholders who may face financial difficulties but still want to retain some life cover.

Drawbacks of Paid-Up Policies

• Reduced Coverage: The coverage amount will be much lower compared to the original sum assured.
• Lower Benefits: Any bonuses or additional benefits will be reduced, and the total payout will be significantly lower.

Conclusion

Paid-up value is a helpful feature for policyholders who can no longer afford to pay premiums but want to retain some level of life insurance coverage. While it reduces the sum assured and the maturity benefits, it ensures that the policy remains active, providing life cover without the need for further premium payments.