Paid-Up Value
Paid-up value is the reduced sum assured a traditional life insurance policy carries when the policyholder stops paying premiums after the policy has acquired a surrender value, allowing the policy to continue in force with proportionally reduced benefits until maturity.
The paid-up policy concept gave policyholders who could no longer afford or did not wish to continue premium payments an alternative to outright surrender. Instead of receiving the surrender value as a lump sum and terminating the policy, the policyholder could 'make the policy paid-up' — stop paying premiums while keeping the policy alive with a proportionally reduced sum assured. This option was available only after the policy had been in force for the minimum period required to acquire a surrender value, typically after two to three years of premium payments.
The paid-up sum assured was calculated proportionally. For a traditional endowment plan, the formula was generally: Paid-Up Sum Assured = Original Sum Assured × (Number of Premiums Paid ÷ Total Number of Premiums Payable). A policy with a 20-year premium payment term where 10 premiums had been paid would be made paid-up at 50 percent of the original sum assured. Accrued bonuses up to the date of making the policy paid-up were also retained and would be payable at maturity or death.
Future reversionary bonuses, however, were typically not added after a policy became paid-up in traditional participating plans — the bonus accrual ceased along with the premium cessation. Terminal bonuses at maturity might or might not be applicable depending on the insurer's product terms. IRDAI's product regulations required insurers to clearly disclose the paid-up value calculation and conditions in their policy document.
For money-back policies, the paid-up value calculation was more complex because survival benefits paid before the date of making the policy paid-up had to be accounted for. The insurer reduced the paid-up sum assured to reflect benefits already disbursed.
Compared to outright surrender, making a policy paid-up was advantageous when the accrued surrender value was still modest but the policy still had many years to run, as waiting allowed accrued bonuses to compound and the paid-up sum assured to grow in real terms through terminal bonuses at maturity. For ULIPs, the equivalent option was switching to the discontinued policy fund, which continued earning a minimum return while the policyholder remained in a mandatory lock-in period.