How to Surrender LIC Policy? An Overview
The Life Insurance Corporation of India offers a wide variety of policies to the people. It is one of the oldest and most renowned insurance companies in India. The majority of people invest some part of their money into various kinds of securities. While it is important to invest for higher returns, it is also important to save for the future. The future is uncertain, anything can happen at any time, and people should be prepared to save themselves and their families. For this, policies play a very crucial role as it saves the insured from unexpected events, in return for some payment called the premium. Generally, LIC policies are long-term investments. But, they offer you the option to cancel your LIC policy. This article covers everything that one needs to know about LIC policy surrender. In this article, you will learn what is LIC surrender, the surrender value of LIC policy, how to close LIC policy, the documents needed for LIC policy withdrawal, what happens when you opt for LIC policy cancellation, and the alternative to surrender of the policy.
What Does Policy Surrender Mean?
When you buy a LIC policy, the term of the policy is defined. You agree to all the terms and conditions of the policy and accept to hold the policy till the maturity date is reached. But, in times of emergency, one might need to withdraw the policy before its maturity to get financial help. Or it could be due to some other reasons too. When someone withdraws the LIC policy before maturity then it is called a surrender of the policy. This option is available to the policyholders at some cost, i.e., they do not get maximum returns out of the policy investment. But, it comes in use at times of emergencies and when people need their savings. The policy is terminated the moment it is surrendered and the coverage is no longer valid.
Usually, there is a minimum period mentioned in the policy, in which the policyholders have to keep the policy and can not surrender it. It varies from organization to organization and policy to policy. This minimum period is decided based on the period and premium payment term of the policy, and is calculated from the day policy was purchased.
Generally, the minimum period is as follows under different instances:
- Single premium plans: Generally the minimum period of holding is for one year.
- Regular premium plans: Generally, if the policy is for a term of fewer than 10 years then the minimum holding period is of two years. Whereas, if the policy is for a term of more than 10 years then the minimum holding period is of three years.
Although, the above-mentioned periods can vary if specifically stated in the policy.
How to Calculate the Surrender Value of LIC Policy?
As mentioned above, when someone withdraws his LIC policy, he does not enjoy the maximum returns. Hence, at the time of surrender of the policy, the policy value is calculated. All additional bonuses, tax benefits received, and premium paid for rider cover is not included while calculating the surrender value. To find the surrender value, one needs to calculate the guaranteed surrender value and the special surrender value. And once you do that, the higher among the two is considered the surrender value of the LIC policy.
The following are the ways to calculate the guaranteed and the special surrender value:
Guaranteed Surrender Value = (Total value of premiums paid * GSV factor) + (Accrued bonus *GSV factor)
Or
Guarantee Surrender Value = [{(Number of premiums paid / Number of premiums payable) * Sum Assured} + Accrued bonus] * GSV Factor
Here, LIC determines the GSV factor, based on the policy year in which the policy is surrendered. If the policy holding period is longer then the GSV factor will be higher, and vice versa.
Special Surrender Value is calculated by the insurance company based on their performance. The company can opt to provide a higher surrender value in case they have a good financial performance. The value is calculated based on the SSV factor which the company decides as per the performance and specifies the amount when the policy is getting surrendered. The SSV factor also increases with time like the GSV factor.
How to Cancel LIC policy?
The following are the steps for how to close the LIC policy before maturity:
- Visit the nearest LIC branch and avail a surrender discharge voucher.
- Form 5074 is the surrender discharge voucher.
- Fill the form 5074 and submit it with the relevant documents.
- Or else, courier the filled form along with relevant documents to the LIC’s head office.
- The process will begin.
- When the request is accepted, the surrender value will be credited to the policyholder’s bank account.
Documents Required to Surrender LIC Policy
One needs to submit some documents while withdrawing their LIC. The documents required are as follows:
- Form 5074- Surrender discharge voucher
- Hand-written application letter stating the reason to cancel the LIC policy.
- LIC NEFT mandate form.
- Original ID proof such as PAN Card, Aadhar card, or driving license.
- Original policy bond
- Canceled cheque to provide bank account details of the policyholder.
What Happens After LIC Policy Cancellation?
The following things happen when someone cancels their LIC Policy:
- The coverage stops immediately
- The policyholder receives the surrender value
- The policy stands void and can not be revived in future
- All benefits applicable cease to apply
- One can not enjoy tax benefits under Section 80C of the Income Tax Act of 1961.
Key Takeaways
- One can not surrender its LIC policy before 1 year.
- A formula is used to calculate the surrender value. If the insurance company performs well in the financial year, then some additional bonus can be added to the value.
- One needs to have all the documents necessary in order to cancel its policy.
- The Life insurance coverage stops immediately.
- The policyholders have an alternative option to convert their policy into a paid-up policy instead of surrendering the policy.
Alternative to Surrender of LIC Policy
When someone surrenders the policy, he can not enjoy the coverage and also maximum returns from his return, and the surrender value is also very low. In this case, there is another alternative available to the people.
They can opt to make their policy a paid-up policy.
A paid-up policy is basically a pause in the policy, i.e., the premium payments get discontinued. This option is available for limited or regular policyholders. When someone opts for this option, the premium stops but the coverage does not. The policy continues till maturity or the demise of the policyholder. Although, the benefits are reduced to a value called paid-up value. In this case, the future benefits are also not declared. And at the time of maturity or demise of the policyholder, the paid-up value is paid
Similar to the minimum policy holding period for surrendering, there is a minimum policyholder period to convert a policy to a paid-up policy. The premiums are compulsory payments until the policy is converted to a paid-up policy. This minimum period is usually to or two three years starting from the purchase of the policy. Although, the period can vary from policy to policy.
The formula to calculate the paid-up value is as follows:
Paid-up value = (Number of premiums paid / Number of premiums payable) * Sum Assured
A bonus earned before the policy is converted to a paid-up policy is added to the paid-up value and any bonus thereafter is not added to the value. Therefore, the formula with the bonus is as follows:
Paid-up value = {(Number of premiums paid / Number of premiums payable) * Sum Assured} + Accrued Bonus.
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Conclusion
This article has covered everything that you need to know about the surrender of policy; Right from how to close LIC policy online to the alternatives available for LIC policy close. Even though this option is available to the policyholders, it is suggested not to surrender your policy as you will lose your life coverage and also get a very low value. You will not get higher returns, and when you buy another policy at a later stage, it will cost you more. Hence, it is suggested not to surrender the policy. You can opt for the other option as it will at least provide life coverage, if not higher returns. Although, if need be, you have the option to surrender the policy and use the money in times of emergency and need. It is a great feature offered by the Life Insurance Corporation of India and is useful at times when you need it the most.
Is there a charge levied on policy surrender?
No, you can surrender the policy free of cost. Although, you have an opportunity cost as you will not get life coverage and maturity benefits along with other benefits such as bonuses.
What is the difference between surrender of policy and a paid-up policy?
In a paid-up policy, you do not have to pay the premiums anymore, but you get the life coverage till the policy expires. Whereas, when you surrender your policy, your policy is no longer applicable and you do not get life coverage. The paid-up value is also higher than the surrender value. But, the paid-up value is paid at the time of maturity and the surrender value is paid immediately.
Can I revive my paid-up policy?
Yes, you can revive it within two years from the date you converted the policy to a paid-up policy. You can revive it by paying the outstanding premium amount along with an interest and a declaration of good health.
How much will I get if I surrender my insurance policy?
Guaranteed Surrender Value is available after three years of holding the life insurance policy. This value is usually around 30% of the premiums you have paid, not including the first year. Between years 4-7 of holding the policy, this goes up to 50%.
Will I get full amount if I surrender my LIC policy?
The policy can be surrendered after it has been in force for at least 3 full years. The Guaranteed Surrender value will be equal to 30% of the total amount of premiums paid excluding the premiums for the first year and all the extra premiums and premiums for accident benefit / term rider.
What happens when you surrender a policy?
Surrendering your policy effectively cancels your life insurance immediately. Your insurer will terminate the coverage and send you a check for the policy's cash surrender value. Cash surrender value is the balance in your policy's cash value account, minus any surrender fees.
How can I know my LIC policy surrender value?
You can calculate the surrender value of your policy using this simple formula [Basic sum assured (Number of premiums paid/Total number of premiums payable) + Total bonus received] x Surrender Value Factor.
What are the benefits of surrender?
Surrender enables goal attainment
By keeping your eye on what you can control–your breath, your emotions, your outlook, and your self-care–surprising things will begin to happen for you. You'll feel positive, happy, and healthy. People will respond to you. You'll feel energized and inspired.What are the disadvantages of surrendering LIC policy?
You will get only 30% of the premiums paid, excluding premium for the first year and any bonus. Also excludes any additional premium paid for riders, taxes and any bonus that you may have received from the LIC.