A paid up policy means, one can continue the policy without paying future premiums with reduced Sum Assured.
Lets see the below example.
Mr.A holds an endowment policy of 25 years Term with 500000 Sum Assured. He paid premium till 10th year from inception of policy. Now due to some undisclosed reasons he wants to discontinue the policy. He has two options before him. Either he can surrender the policy or he can make the policy Paid Up.
If Mr. A has financial contingency, he can surrender the policy and cash out, but the proceeds will be very less.The surrender value would be approximately 30% of premiums paid and accrued bonus.
If he decides otherwise, he can make the policy paid up and enjoy life insurance till full term of policy but with reduced sum assured.
A Simple calculation of Paid up value based on above example.
Paid up value=(Sum Assured*No of premiums paid)/Total No of premiums due.
As per above example
Paid up Value = (500000*10)/25 = 200000
So the Sum Assured is reduced to 200000 and bonus accrued thus far is also added to the policy.
In case of death during the rest of the term, the nominee will get this reduced sum assured plus bonus if any.