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.

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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.

Benefits of a paid-up policy

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

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

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

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

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

Paid-up Policy Conditions

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

  • If the policy term of the life cover is less than 10 years, you have to have paid the due premiums for at least 2 years. 

  • If the policy term is more than 10 years, due premiums for at least 3 years have to be paid in full. 

  • Once the policy acquires the paid-up status, it will no longer participate in the profits of the company. This means that no future bonuses will be added to the reduced sum assured. 

  • If you have riders (add-on protection) attached to your base policy, these won’t acquire any paid-up value. 

  • In case of ULIPs which come with a lock-in period, your policy will acquire a paid-up value only after the end of the lock-in period. 

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 formula - 

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

Let’s look at an 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.

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