The concept of Paid Up Policy applies strictly to Traditional Life Insurance Plans only and not to Unit Linked Insurance Plans. ULIPs can be surrendered, but it need not acquire a Paid-Up Value for the same. The surrender value is a part of the Fund Value of the ULIP.

When the premium of a life insurance policy is not paid on time, the policy lapses and most of its benefits cease to exist. In case of a lapsed traditional insurance policy, if the premiums are paid for a minimum 3 years the policy gets converted into Paid Up Insurance Policy. In this case, the paid premiums are not lost. In such cases the sum assured of the policy is reduced in proportionate with the number of premiums paid and total number of premiums of the policy.

Thus, a Paid-Up Policy is when the customer has stopped paying premiums, but there is some money that is due to the policyholder but is with the insurance company for the time being. It continues to earn interest from where it has been invested and hence the Paid Up Value of the life insurance policy keeps increasing. If the policy money is not withdrawn, it continues till the end and the Maturity Benefit is paid out, according to the reduced Sum Assured. If the money is withdrawn before the policy matures, then it needs to be surrendered to receive a cash value of the Paid-Up Policy.