Reduced Paid-Up In Endowment Plan

As you are already aware, all insurance plans require you to make premium payments as per the agreed schedule before buying the policy, to extract the promised returns in the plan.

For some reason, you may not be able to continue paying the premium - because of a temporary financial crisis, increased expenses, or losing a source of income that was funding the investment in the savings plan.

In such situations, insurance companies offer you two options. One is to discontinue the plan and withdraw the money invested (called surrender) and the other is an option to discontinue the plan while staying invested (called reduced paid up)

We discussed surrendering an Endowment Plan (also called a Guaranteed Plan) in a previous article. Today let’s learn about how you can stop paying the premium, but continue the plan - or convert the plan into a reduced paid-up plan in detail.
 

How Does A Reduced Paid-Up Endowment Plan Work?

When you decide to stop paying premiums, but want to continue the benefits in the plan, the insurer will simply reduce all the benefits (maturity as well as death benefits) in proportion to the premiums you have already paid.

Instead of withdrawing and booking the loss from the surrender of the plan, you essentially can continue enjoying these reduced benefits without making any future premium payments under the Endowment Plan.
 

How Will The Benefits Under Your Plan Reduce?

Let’s take a look at how the maturity benefit, death benefit, bonuses, guaranteed additions, etc. will reduce under your Endowment Plan - after it is converted to reduced paid-up.

Maturity Benefit

The maturity benefit will be paid to you if you survive till the end of the policy tenure. Generally, the maturity benefit payable under an Endowment Plan is any one of the following -

• The sum assured you select at the time of policy purchase.
• The total premiums paid by you, excluding taxes, underwriting extra premium, and rider premium (if any).
• A percentage of the premiums paid by you minus the taxes, rider premiums, underwriting extra premiums, and loadings for modal premiums.

Now, the maturity benefit payable after your Endowment Plan gets converted to reduced paid-up will be referred to as reduced maturity benefit. It will be reduced in proportion to the RPU Factor.

What is the RPU Factor? It is the number of premiums you have paid to the total number of premiums payable during the policy tenure. This is the RPU Factor. The formula to calculate the RPU Factor is -

RPU Factor = Total No. of Premiums Paid / Total No. of Premiums Payable

And, the formula to calculate the reduced maturity benefit is -

Reduced Maturity Benefit = Maturity Benefit X RPU Factor

Example: Mrs. Kapoor buys a Non-Participating Endowment Plan with a sum assured of ₹30 Lakhs. She will receive this amount as the maturity benefit. Also, the annual premium payable under the plan is 3 Lakhs. She opts for a policy duration of 25 years and a premium paying duration of 10 years. In the 5th policy year, she gets diagnosed with a serious illness and is not able to afford the premiums. So, she decides to stop paying the premiums and chooses to continue the plan on a reduced paid-up basis.

RPU Factor = No. of Premiums Paid / No. of Premiums Payable

= 5/10

= 0.5

Reduced Death Benefit = Sum Assured X RPU Factor

= 30,00,000 x 0.5

= ₹15,00,000

So, Mrs. Kapoor will receive the maturity benefit of ₹15,00,000 - if she survives till the end of the policy term.

Death Benefit

The death benefit will be paid to your nominee if you, unfortunately, pass away during the policy term. Now, if your Endowment Plan gets converted to reduced paid-up, the death benefit payable under it will be referred to as reduced death benefit. It will be reduced in proportion to the RPU Factor. That is, the number of premiums you have paid to the total number of premiums payable during the policy tenure.

The formula to calculate the RPU Factor is -

RPU Factor = Total No. of Premiums Paid / Total No. of Premiums Payable

And, the formula to calculate the reduced maturity benefit is -

Reduced Death Benefit = Death Benefit X RPU Factor

Example: Mr. Khare buys a Non-Participating Endowment Plan with a sum assured of ₹50 Lakhs. He will receive this amount as the death benefit, if any. He opts for a policy duration of 20 years and a premium paying duration of 15 years. In the 12th policy year, he stops paying the premiums because of financial reasons and decides to continue it on a reduced paid-up basis.

RPU Factor = No. of Premiums Paid / No. of Premiums Payable

= 12/15

= 0.8

Reduced Death Benefit  = Sum Assured X RPU Factor

= 50,00,000 x 0.8

= ₹40,00,000

So, Mr. Khare’s nominee will receive a death benefit of ₹40,00,000 - if he passes away while the Endowment Plan is active.

Guaranteed Addition

The guaranteed additions may or may not be paid once the plan is converted to reduced paid-up. If it is mentioned in your policy documents that you are eligible to receive the guaranteed additions, then, they will be payable to you in any one of the following ways -

Option:-1 The insurance company will pay all the guaranteed additions that have accrued till your plan is converted to a reduced paid-up plan.

After that, no guaranteed additions will accrue under your Endowment Plan.

Option:-2 The insurance company will pay 100% of the guaranteed additions accrued till your plan is converted to a reduced paid-up plan.

After that, the guaranteed additions will be reduced. These reduced guaranteed additions will be calculated and paid out based on your plan’s reduced sum assured.

Example: Mr. Khan buys a Non-Participating Endowment Plan with a sum assured of ₹40 Lakhs for a duration of 15 years. This amount will be paid at maturity or in the event of his death. The premium payment term under his plan is 10 years. And, let’s assume that he receives yearly guaranteed additions of ₹10 per ₹1000 of the sum assured till the end of the policy term.

Guaranteed Additions Payable Every Year = Rs. 10 per 1000 (Sum Assured)

Guaranteed additions payable to Mr. Khan every year = 10 x [40,00,000 ÷ 1000]

= 10 x [4000]

= ₹40,000

Let’s say Mr. Khan stops paying the premiums in the 9th policy year - and his policy gets converted to a reduced paid-up policy. Let’s understand how the guaranteed additions will be paid to him.

Scenario 1 - The insurer will pay the guaranteed additions accumulated only up to the date Mr. Khan’s Endowment Plan became a reduced paid-up one.

Mr. Khan has paid premiums for 9 years. And, the guaranteed additions get added at the end of each policy year. So, Mr. Khan will get the guaranteed additions accrued over 8 policy years. No guaranteed additions will accrue after his Endowment Plan becomes a reduced paid-up plan.

Guaranteed additions payable to Mr. Khan = 40,000 x 8 = ₹3,20,000

So, guaranteed additions of ₹3,20,000 will be payable under Mr. Khan’s Endowment Plan.

Scenario 2 - Mr. Khan will receive -

Guaranteed additions accrued until the date his plan is converted to reduced paid-up.

Reduced guaranteed additions till the policy term ends or his death - whichever happens earlier.

Mr. Khan has paid premiums for 9 years. And, the guaranteed additions get added at the end of each policy year. So, Mr. Khan will get the guaranteed additions accrued over 8 policy years.

Guaranteed additions payable to Mr. Khan = 40,000 x 8 = ₹3,20,000

After the policy is converted to reduced paid-up, this is how the sum assured will be reduced -

RPU Factor = 9/10 = 0.9

Reduced Sum Assured = RPU Factor X Sum Assured

= 0.9 x 40 Lakhs

= ₹36,00,000

Reduced guaranteed additions = ₹10 per ₹1000 of the reduced sum assured.

= 10 x [36,00,000 ÷ 1000]

= 10 x 3600

= ₹36,000

So -

• Guaranteed additions of ₹3,20,000 will be paid for the first 8 years.
• Reduced guaranteed additions of 36,000 will be paid every year till the end of the policy term or Mr. Khan’s death - whichever happens earlier.

Important! Please Note

If the Endowment Plan gets converted to reduced paid-up, the loyalty additions under the plan (if any) will not be paid by the insurance company.

If you have opted for riders with the plan, those rider benefits will cease as well.
 

Wrapping Up!

That is all from our side today. We hope this article helped you gain enough clarity on how the benefits under your Endowment Plan will reduce - if you stop paying the premiums and choose to continue it on a reduced paid-up basis.