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Meaning of Paid-up Policy in Insurance

An insurance policy is usually bought for a minimum of 10 years of coverage. As such, premium payments tend to stretch for a long time. Now, when life hits you with unexpected circumstances, you may have to pause your premium payments to take care of the situation. This is where the paid-up value comes into play, wherein you do not lose out on all the benefits if you stop paying premiums.
Let’s see how: 

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Paid-up Insurance Definition

A paid-up insurance policy is one where the policyholder stops premium payment but continues to enjoy insurance coverage. The sum assured in such cases reduces to a value based on the number of premiums paid till date. Basically, when the policy acquires this paid-up value, it will be known as a paid-up insurance policy. It ensures that you do not lose out on the entire benefit of the life cover.

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What are the Benefits of a Paid-up Policy?

Here is a list of benefits of opting for life insurance with paid up policy benefits:

  • Financial Security: The reduced sum assured is payable on the death of the policyholder or on the maturity of the policy. 

  • Multiple Payout Options: Some insurance policies offer the option to receive the paid-up sum assured in installments instead of a lump sum under the settlement option. 

  • Avail Bonuses: Simple reversionary bonuses remain attached to the reduced paid-up sum assured with LIC policies that come with the said provision. 

  • Loan Benefits: Loan benefits may also be applicable with some life insurance policies if it has acquired a surrender value. 

  • Tax Benefits: The premiums paid under a paid up policy offer tax benefits u/s 80C and 80D, whereas the benefits received are tax exempted as per Section 10(10D) of the Income Tax Act, 1961.

You are advised to read the policy brochure carefully to understand the full extent of the benefits applicable under paid-up policies. 

What are the Paid-up Policy Conditions?

For the policy to acquire a paid-up value, the policyholder must make sure to fulfill the following conditions. 

  • The paid up policy has been active for more than 3 years (5 years in the case of a ULIP plan)

  • The paid up policy has to have an investment value 

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How to Calculate the Paid-up Value of Life Insurance Policies?

The sum assured under a paid-up policy reduces when you stop paying your premiums. The reduced sum assured calculation factors in the premiums paid, premiums due, the basic sum assured at policy inception, and the already attached bonus amount. 

You can calculate the paid-up value of your own policy using the following paid up value formula- 

(Number of premiums paid / Number of premiums due) multiplied by the Basic Sum Assured plus Attached bonuses.

Let’s look at a paid-up policy example to help you understand this better. Say that you bought a policy for a sum assured of Rs. 10 lakhs. You are required to pay regular annual premiums for a period of 20 years but stop after 10 years. Based on this, the paid-up value will be equal to (10/20) multiplied by Rs. 10,00,000, which is Rs. 5,00,000. If the policy has accrued bonuses amounting to Rs. 50,000 in the 10 years, the total sum that you will be entitled to is Rs. 5,50,000. 

Paid-up Value versus Surrender Value

If you aren’t in any urgent need of money, it would be wise to let the policy acquire a paid-up value instead of surrendering it. This ensures that your life cover remains intact, albeit reduced. In the event of your unfortunate demise, your family will still receive the reduced sum assured to finance their needs in your absence. However, surrendering the policy will make more sense if you are in a financial emergency and need immediate liquidity.

Wrapping it Up!

To answer what is paid up policy, it is a feature where in case the policyholder is unable to pay the premiums within the specified grace period, the policy gets paid up instead of lapsing. This means that the policy will still continue providing coverage to the life assured, but the life cover will reduce based on the premiums paid till that point. You can learn more about paid up policy meaning by going through the policy documents.

FAQ's

  • Q: Should I buy term insurance or life insurance?

    Ans: Whether you should buy term insurance or life insurance depends on your individual needs. If you are looking to secure your loved ones at affordable premiums, then term life insurance might be the right option for you. Whereas, if you are looking to buy a plan that offers financial security for the family as well as wealth creation, then life insurance might be a better fit for you. However, you should always take a thorough look at the policy details for a better understanding of the benefits offered.
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