Differentiate between surrender value and paid up value. Which is a better option for a policyholder to exercise, if he wants to discontinue the policy?

Paid up Value: When one stops paying premiums after a certain period, the policy continues but with lower sum assured. This sum assured is called the paid up value. The paid up value also refers to the value of a life insurance policy which lapses after acquisition of surrender value, but is not surrendered, the policy does not lose any benefits. The sum assured shall be redeemed in the same rate as the number of years the premium actually paid bears to the total number of years for which the premium are payable. However, the policy is not eligible for any future bonuses. Surrender Value: Surrender is voluntary termination of a Policy contract only by the Policyholder. More the number of premiums paid, more is the surrender value. Surrender value factor is a percentage of paid up value plus bonus. If the Policy has acquired surrender value, then surrender value is paid to the Policyholder and the contract comes to an end. Under Traditional products, the rules for Surrender value are as follows: No Surrender Value for Term, Health & Annuity products. For Premium Paying Term (PPT) of 10 years or more, surrender value gets acquired after paying 3 years' premiums. For PPT less than 10 years, surrender value gets acquired after 2 years premium. Minimum amount payable as Guaranteed Surrender value (Non-single): 30% of premiums paid (less survival benefits paid) if surrendered in second and third policy years; 50% if surrendered between fourth and seventh; 90% of surrendered in last 2 years (for less than 7 year); Beyond 7 year term, to be decided in file & use document (which gives the product features including policy benefits and premiums payable) to be filed by the Life insurer with the Regulator. If a policy holder wants to discontinue his policy, he can opt for the paid up value of the policy, as in paid up value option policy remains valid and sum assured reduced in the same ratio as the number of years the premiums actually paid bears to the total number of years for which premiums are payable and surrender value option the policy is terminated. Which is a better option? The 'paid-up value' option is generally better if a policyholder wants to discontinue the policy, as the policy remains valid, albeit with a reduced sum assured. This allows the policyholder to retain some insurance coverage and benefits, whereas 'surrender value' terminates the policy completely, and the amount received might be less than the premiums paid, especially in the initial years.