Reduced Paid-Up In Guaranteed Income Plan

You buy a Guaranteed Income Plan (also known as a Money-Back Plan) with the objective that it will help cover several goals in your life. However, simply buying the plan is not enough. You are required to make regular premium payments under it - to keep it active. If you fail or stop paying your premiums, all benefits under your plan will either entirely stop or be reduced.

Basically, if you fail to pay your premiums on time for whatever reason, the insurer will give you two options -

• You can take the surrender amount and discontinue the policy.
• You can continue the policy on a reduced paid-up basis without paying the remaining premiums.

Let’s learn about both these nuances in detail.

• Take The Surrender Amount And Discontinue The Policy
  Your Guaranteed Income Policy will gain a surrender value if you’ve completed at least 2 or 3 premium payments under it. If you surrender your plan after it acquires a surrender value, the insurer will pay this surrender amount to you.

  Generally, there are two types of surrender values -

• Guaranteed Surrender Value (GSV)
  You are guaranteed to receive this amount. GSV is calculated as a proportion of total premiums paid minus previously paid survival benefits.

• Special Surrender Value (SSV)
  This amount, unlike GSV, is not guaranteed. The insurance company declares SSV on a regular basis with prior approval from the IRDAI.

• Continue The Policy On A Reduced Paid-Up Basis
  Your Guaranteed Income Plan will be converted to a reduced paid-up policy if you don't take the surrender value and stop it. All benefits payable under your policy will be reduced as a result. You can continue to enjoy these reduced benefits without making any further premium payments.
   

How Does A Reduced Paid-Up Guaranteed Income Policy Work?

As discussed above, if your Guaranteed Income Policy is converted to reduced paid-up, the sum assured as well as benefits like death, maturity, survival benefits, etc. will be reduced.

How? Let’s see!

• Sum Assured Under A Reduced Paid-Up Guaranteed Income Policy
  The sum assured that you select at the time of policy purchase or the sum assured that is calculated based on the premium you select will be reduced proportionately, and referred to as ‘reduced sum assured’. This proportionate reduction is called the RPU Factor.

  Here’s the formula to calculate the RPU Factor -

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

  And, here’s the formula to calculate the reduced sum assured -

  Reduced Sum Assured = Sum Assured x RPU Factor

  Now, let’s see how the survival, maturity, and death benefits reduce after your Guaranteed Income Plan becomes reduced paid-up.

• Survival Benefit
  The survival benefit payable under a Guaranteed Income Plan may either be a percentage of the sum assured you choose or the annual premiums you pay. If your policy is converted to a reduced paid-up policy, the survival benefit will be reduced in proportion to the RPU Factor.

  As discussed above, RPU Factor is the total number of premiums you have paid under your plan divided by the total number of premiums payable.

• Maturity Benefit
  If your policy is converted to reduced paid-up and you survive the entire policy tenure, you will receive the reduced sum assured as the maturity benefit.

• Death Benefit
  If you continue your Guaranteed Income Plan on a reduced paid-up basis and pass away while the plan is active, your nominee will receive the reduced sum assured as the death benefit.

  Let’s understand how all these benefits are reduced with the help of a detailed example.

  Mr. Shetty buys a Non-Participating Guaranteed Income Plan with a cover amount of Rs 20 Lakhs. This amount will be paid to him either as a maturity benefit if he outlives the policy term. If he doesn’t, it will be paid to his nominee as the death benefit. He appoints his daughter Kainaat as the nominee.

  He opts for a policy duration of 20 years and chooses a 10-pay limited pay option. He needs to pay an annual premium of Rs. 2 Lakhs under the policy. And, after the completion of the premium payment term of 10 years, 10% of the sum assured will be paid every year as the survival benefit for 10 years.

  In the 5th policy year, Mr. Shetty is facing some financial hardships and hence, he stops paying the premiums. He decides to continue the policy on a reduced paid-up basis. Let’s see how the death, maturity and survival benefit will be reduced under his Guaranteed Income Plan.

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

  = 5/10

  = 0.5

  To understand how the survival, maturity and death benefits under Mr. Shetty’s policy will be reduced, we will first need to find out the reduced sum assured under his policy.

  Reduced Sum Assured = Sum Assured X RPU Factor

  = 20,00,000 X 0.5

  = Rs. 10,00,000

  Survival Benefit
  Mr. Shetty will start receiving the survival benefit payouts from the 11th policy year. Let’s see the reduced survival benefits payable under his plan.

  Year	%	Reduced Sum Assured	Reduced Survival Benefit
  11th Policy Year	10%	Rs. 10,00,000	Rs. 1,00,000
  12th Policy Year	10%	Rs. 10,00,000	Rs. 1,00,000
  13th Policy Year	10%	Rs. 10,00,000	Rs. 1,00,000
  14th Policy Year	10%	Rs. 10,00,000	Rs. 1,00,000
  15th Policy Year	10%	Rs. 10,00,000	Rs. 1,00,000
  16th Policy Year	10%	Rs. 10,00,000	Rs. 1,00,000
  17th Policy Year	10%	Rs. 10,00,000	Rs. 1,00,000
  18th Policy Year	10%	Rs. 10,00,000	Rs. 1,00,000
  19th Policy Year	10%	Rs. 10,00,000	Rs. 1,00,000
  20th Policy Year	10%	Rs. 10,00,000	Rs. 1,00,000

  Maturity Benefit
  If Mr. Shetty survives till the end of the policy term, he will receive the reduced sum assured of Rs. 10 Lakhs as the maturity benefit - and then, the policy will end.

  Death Benefit
  If Mr. Shetty passes away during the policy term, Kainaat will receive the reduced sum assured of Rs. 10 Lakhs as the death benefit.

Please note: Once the Guaranteed Income Plan becomes reduced paid-up, the insurer will not pay loyalty additions (if any). And, the rider benefits (if any) under the policy will stop too.
 

Wrapping Up!

So, that is how a Reduced Paid-Up Guaranteed Income Policy works. If you stop paying your premiums and continue it on a reduced paid-up basis, all benefits payable under it, i.e., the death, maturity, and survival benefits will be reduced. All of these benefits will be reduced in proportion to the number of premiums you have paid to the total number of premiums payable. To avoid any surprises later, make sure you understand how much benefits you or your nominee will receive before converting your policy to reduced paid-up.