People often purchase LIC policies without understanding the terms and conditions wholly. This, in turn, results in surrender of the LIC policy before maturity, thereby substantially reducing the amount that one receives, known as surrender value.
Policyholders often surrender their policies, primarily because they are not satisfied with the features and benefits. However, there are certain rules surrounding this concept. A policyholder will only be able to surrender his/her policy after having paid the premiums diligently for 3 years. Upon surrendering the policy, LIC provides a certain portion of money to the policyholder. This amount of money is known as surrender value. Surrender of a policy is not considered to be a suitable option as the surrender value is always proportionately low.
What are the Implications of LIC Policy Surrender?
Following are some of the ways in which a policyholder gets affected if he/she decided to surrender his/her LIC policy:
- Since the contract between the insurer and the insured is revoked, the life cover component will not exist after the policyholder has surrendered his/her policy. Therefore, any benefits that were previously accessible will cease to be valid.
- There are multiple tax benefits that one can leverage for a life insurance policy under Section 80C of the Income Tax Act, 1961. These benefits, too, will be revoked as surrender means a closure of the existing contract. Tax benefits for traditional life insurance policies are revoked if the policy ceases to exist/is surrendered within two years of the commencement date whereas for ULIPs, this period of time is extended to five years.
Types of Surrenders in LIC Policy:
Typically, there are two types of surrenders available in this scenario:
Special Surrender Value:
If the policyholder has paid his/her premiums regularly for more than 3 years, but less than 4 years, 80% of the total maturity sum assured amount is provided by LIC to the policyholder. If the policyholder has paid his/her premiums regularly for more than 4 years, but less than 5 years, 90% of the total maturity sum assured amount is provided by LIC. The policyholder receives 100% of the maturity sum assured if he/she has diligently paid premiums for more than 5 years.
Guaranteed Surrender Value:
A policyholder can surrender his/her policy only after the completion of 3 years, i.e. the policy has to have been in force for a period of 3 years, at least. The surrender value provided by LIC is essentially 30% of the premiums that have been paid so far. However, this will exclude premiums that were paid during the first year of the policy, and premiums paid towards accident benefit/term rider.
LIC’s Take on Surrender of Policies:
The Corporation typically pays the special surrender value to any policyholder who wishes to surrender his/her policy after a period of 3 years. The special surrender value, however, is wholly dependent on the time span for which the premiums have been paid and the duration of the policy on the surrender date.
Mandatory Documents for Policy Surrender:
Policyholder will be required to carry the following documents during the time of surrender of policy:
- Policy bond - the original copy
- Printout of LIC policy surrender form No.5074
- A cancelled cheque from the policyholder’s bank
- Policyholder will be required to utilise the LIC NEFT form, if above-mentioned form No.5074 is not being used
- Proof of identification like Aadhaar card needs to be carried along
LIC usually reviews the terms and conditions surrounding surrender value based on factors such as experience, economic environment, and so on.