What is Paid-Up Policy In Insurance?

Paid-Up Policy In Insurance

Paid up policy can be availed by people in case they do not wish to make any further payment but want to stay invested in the life term insurance plan. Let’s find out what is paid up policy, in this post.

If a policyholder doesn’t want to make any more payments for his/her life insurance policy but at the same time wants to remain invested in the plan, the person has the option to avail ‘Paid Up’ policy.

Now, what does ‘paid up’ policy mean?  Well, ‘Paid up’ policy in insurance is like a life insurance policy in which the insured has paid all the premiums and there is no commitment from the side of the insured. The insured, in this case, doesn’t make any further or subsequent payments of the premium. However, the policy stays intact till the termination of plan or death of the insured.

So, we can say that a paid up insurance plan is a life insurance plan that is paid completely and is in operation. Here, the policy continues to operate, however, the benefits received get reduced. There is no burden of paying any money for the insured and the policy will stay valid till it reaches maturity or till the death of the policyholder.

As we know, life term insurance plans are generally long duration policies where the insured is required to pay the premium for long tenure throughout the policy term.  However, it might happen with many policyholders that they are unable to pay any further premium due to some or the other reason. But at the same time they do not want to close the policy either. So, in such a case , the insurer reduces the sum assured as per the already paid premiums of the policy and this is called paid-up policy. Here, the insured is not required to pay any more premiums.  However, there are some conditions that need to be followed before the insured could convert their life insurance policy to a paid-up plan.

Let’s check the conditions under which paid -up policy works.

How does Paid-Up Policy work?

Paid-up policy option is offered by many insurers to keep life insurance policies in force, especially for those people who fail to pay premiums after a certain period of time. However, the key requirement to convert a policy into paid-up is that the policy should acquire surrender value.

Further, there are some other conditions that are also required to be fulfilled if the insured wants to acquire paid-up value, such as:

• If the policy tenure is less than 10 years, the insured must pay premiums for at least 2 years
• If the tenure of the policy is more than 10 years, the insured needs to pay premiums for at least 3 years
• Further, a paid-up plan may not fetch the insured any profits or bonuses with the sum assured at the time of maturity
• The riders that were added to the life insurance policy also do not gain any paid-up value
• In case of ULIPs, the insured can expect to obtain a paid-up value only if the policy has completed the lock-in period

Can you calculate the paid-up value by using a calculator?

Yes, you can see how to calculate the paid up value of LIC policy.  Below is the formula that can be used to calculate paid-up value in a policy:

Sum Assured (premiums already paid/premiums that are payable) = Paid-Up Value

For instance, imagine that you bought a life insurance policy with INR 5 lakh as sum insured for 20 years.  Now you start paying the annual premium every year till 10 years. After 10 years, you had difficulty in paying the premium and you wanted to get the policy converted to paid-up.

So, in this case you can calculate the paid-up value as:

Paid-Up Value = sum assured (5,00,000 * 10/20) = 2,50,000

Further to the paid-up option, the insured also has a surrender option that they can avail in case of life insurance policies.

Read More: What Happens If You Provide False Information On A Life Insurance Proposal Form?

Surrender Option in Life Insurance

Surrender option is a benefit offered to the policyholder, which they can avail in case they are not happy with the insurance plan, its coverage or return. Here, the policyholder can surrender the plan after 3 years of premium payment and take their money back. However, the value received on surrendering the policy is based on a certain percentage of the premiums paid. This percentage depends on the time of surrender of the policy and it deducts the premium paid in the first year. The percentage also differs as per insurer along with year of surrender.

Paid-Up Vs Surrender: Which is better?

Both paid-up and surrender value have different uses. An insured can use a paid-up option when:

• His/her policy is about to reach maturity in the near future
• He/she don’t have immediate requirement of money
• But, the person can’t pay premium due to some reason

Conversely, surrender option is used by people:

• Who have any urgent monetary requirement
• Whose policy is reaching maturity in 8-10 years
• They want to use the money to fulfill an immediate need or use the money in other good investments

Advantages of a Paid-Up Policy

Let’s check the benefits that an insured can get from a paid-up policy:

• In case of paid-up policy, the insured is still protected under the policy and the family of the insured still receives the death benefit in case of demise of the policyholder during the policy tenure. Further, buying a new plan after a certain age is normally very costly
• Also, if your policy has already acquired any bonus till you were making the payments of the premium, it is added to the paid-up value
• The insured can also get loan benefit if the policy has been paid for a certain time duration and it has acquired a surrender value
• You can seek for installments based payment of the paid up value at the time of claim settlements

To Conclude

Now you know what a fully paid up policy is? However, it is advised to read the policy document thoroughly before you choose to convert your policy into a paid-up one. You must also check with the insurance company before buying your plan if they allow a paid-up option. Rather than closing the policy via the surrender option, it is better to stay covered with a reduced paid-up policy even with a lowered sum assured.

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