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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.
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:
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.
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.
Both paid-up and surrender value have different uses. An insured can use a paid-up option when:
Conversely, surrender option is used by people:
Let’s check the benefits that an insured can get from a paid-up policy:
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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