Paid-up value

What is paid-up value?

Paid-up value is the reduced amount of cover a life insurance policy keeps when the policyholder stops paying premiums, provided the policy has already acquired a surrender value. Instead of lapsing and losing everything, the policy becomes "paid-up": no more premiums are due, and it continues to the original maturity date with a smaller sum assured. The reduced sum assured is called the paid-up sum assured, and the policy is often called a reduced paid-up (RPU) policy.

Paid-up value is one of the non-forfeiture benefits in life insurance. The other main one is the surrender value. Both exist so that a customer who has paid for some years does not forfeit all of it.

How paid-up value is calculated

Schedule I of the IRDAI (Insurance Products) Regulations, 2024 sets the formula for non-linked policies other than single premium. The paid-up sum assured, before adding bonuses or guaranteed additions, must be at least:

Paid-up sum assured = original sum assured × (period for which premiums have been paid ÷ maximum period for which premiums were payable)

The same ratio applies separately to the sum assured on death (or health cover) and the sum assured on maturity. The insurer may adjust for survival benefits already paid, as in money back plans. Any reversionary bonuses already attached stay with the policy. A par policy that becomes paid-up normally stops earning future bonuses, though the exact rule depends on the product terms.

The 2024 Regulations also say that a non-linked policy which has acquired a surrender value shall not lapse for non-payment of further premiums. It continues to the extent of the paid-up sum assured and subsisting bonuses. Under the same schedule, the guaranteed surrender value is acquired once premiums have been paid for at least two consecutive years.

There is a minimum size. A policy does not continue as paid-up if its paid-up sum assured (without bonuses) is below ₹2,500, below ₹500 for a micro insurance policy, or if it takes the form of an annuity under ₹250 a month. Such a policy may be terminated after the revival period by paying the surrender value.

Paid-up value in ULIPs

For a ULIP discontinued after the five-year lock-in, the policy converts to reduced paid-up status after the grace period, with the sum assured cut using the same ratio of premiums paid to premiums payable. Rider cover stops. The insurer may keep deducting charges during the revival period, but mortality charges are based only on the reduced paid-up sum assured. If the policyholder neither revives nor surrenders within the three-year revival period, the fund value is paid out and the policy ends.

Example

A customer takes a 20-year endowment plan with a sum assured of ₹10 lakh and a 20-year premium paying term. After paying for 8 years, the customer stops. The paid-up sum assured is ₹10 lakh × 8/20 = ₹4 lakh. If bonuses of ₹1.6 lakh had been declared by then, the policy would pay at least ₹5.6 lakh at maturity or on earlier death, with no more premiums due. The customer could instead surrender for cash or revive the policy within the five-year revival period by paying the arrears.

What paid-up value means for distribution

For sales teams and service desks, paid-up status is the middle option between a full lapse and a surrender, and it is often the least understood.

• Explain it at the sale. The 2024 Regulations require the customer to be told the terms on lapse and surrender, and the signed benefit illustration shows values across durations. Customers who know a paid-up option exists are less likely to surrender in a cash squeeze.
• Paid-up policies hurt persistency numbers. A paid-up policy is no longer paying renewal premium, so it drops out of premium-based persistency even though the contract is still alive. Renewal teams should treat a recently paid-up policy as a revival lead, not a closed case.
• Revival is often the better outcome. Restoring the full sum assured within the revival period usually gives the family more cover than the paid-up amount. Advisers should compare the two in writing.
• Watch the protection gap. A paid-up savings plan can leave a family with a fraction of the cover they believe they have. A good adviser states the new death benefit in rupees, not as a percentage.
• Commission stops, service does not. No renewal commission is earned on a paid-up policy, but nominee updates, claim support and maturity servicing still fall on the distributor of record.