Life insurance policies are fairly simple when it comes to understanding their features. One of those features is ‘surrender of policy’.
As simple as purchasing an LIC policy is, the process of surrendering the same is equally effortless. With respect to a term insurance policy, if you put your premium payment on hold, your policy will lapse. However, this is only with regards to the risk cover. There are no additional costs or pitfalls attached to this.
In case of a traditional life insurance policy like a money back plan, if you choose to discontinue at an early stage, then the insurance company substantially reduces the primary maturity sum amount. As a result, the amount of money received in the form of in-hand returns is also reduced to a great extent.
Eligibility Criterion to Surrender LIC Policy
It is typically not recommendable to surrender LIC policy, however, if the need arises one has to bear in mind that the eligibility criterion in this regard is three years. This means that you have to have held the policy for a minimum timeframe of three years before you can surrender it. Once you have surrendered your LIC policy, the insurer will provide you with a portion of money known as ‘accumulated bonus’ along with the premiums that you have paid for that period of time.
Demerits of Surrendering LIC Policy:
- The primary reason for investing in a life insurance policy is to secure the financial future of an individual’s family. This reason is defeated when a policyholder surrenders his life insurance policy, as the life cover factor is not available anymore.
- If a policyholder wants to invest in the same LIC policy a few years later, he/she will have to pay an increased premium amount. This is because the individual’s age has increased and subsequently, the risk too.
- Depending on the terms and conditions of the LIC policy, the accumulated bonus will be given. Since surrendering a policy is considered equivalent to breaking a contract, the policyholder will receive only a limited portion of money that he/she has paid as premiums.
- Surrender value is negated completely if the policyholder wishes to surrender his policy before completion of three years.
Types of Surrenders in a Conventional LIC Policy:
- Surrender Value: If you are terminating your LIC contract prematurely, you will still be eligible to a portion of money known as surrender value. This amount is usually bigger than guaranteed surrender value and special surrender value.
- Guaranteed Surrender Value: As the name suggests, this is a portion of money that is payable to the policyholder if he/she volunteers to surrender the LIC policy. Guaranteed surrender value is essentially 30% of the overall premiums that you have paid so far. This, however, excludes the premiums that were paid during the first year of the policy, extra premiums, and the ones paid towards riders (accident rider).
- Special Surrender Value: If you have paid premiums towards your LIC policy for more than three years, but less than four years, then you will receive 80% of the maturity sum assured as a special surrender value. Moreover, if you have paid your premiums for more than four years, but less than five years, then you will receive 90% of the total maturity sum assured as a special surrender value. A 100% special surrender value is given out if the policyholder has regularly paid the premiums for five years.
Paid Up Value: What Does it Mean?
Fundamentally, any policy that has lapsed within three years of purchasing it, and for which premiums have been paid diligently (for three years), is referred to as a paid up policy. The paid up value is essentially a reduced sum assured amount which was originally available when the policy was bought.
Surrender Value Vs Paid Up Value
|Paid Up Policy||Surrendered Policy|
|Policyholder does not receive a lump sum amount of money immediately||Lump sum amount is immediately available to the policyholder|
|On the event of the policyholder’s death or maturity of the policy, the total paid up value is given||On the event of maturity of the policy or the life assured’s death, no compensation will be given|
|Not eligible for any extra future bonus||Not eligible for any extra future bonus|
What are the Important Documents Required for Surrendering LIC Policy?
The following are the documents that are mandatory for surrendering LIC policy:
- The policy bond (original document)
- Physical copy of LIC Policy Surrender Form No.5074
- Bank account information of the policyholder will be required
- Proof of identification such as voter’s ID, PAN, or driving license will be required when surrendering LIC policy.
Approximately five to ten days after the required documents and form have been submitted, the fund will be transferred to the policyholder’s bank account.