Policybazaar Insurance

Your Guide on How to Surrender LIC Policy!

We Are Rated

4.6/5

17,000+

google-logoReviews
50+

Insurance Partners

1 Million+

Trusted Customers

250 K+

Policies Sold

Invest AED 2K/Month & Get AED 1 Million returns*
undefinedIcon
undefinedIcon
undefinedIcon
undefinedIcon
By Clicking on "Invest Now", I declare that I am a resident of UAE and holding a valid Visa and agree to the website Privacy Policy and Terms of Use.
certified-icon Qualified Policybazaar expert will assist you

Life is a journey full of unexpected twists and turns, with our financial needs changing along the way sometimes. If you find yourself in a situation where surrendering your Life Insurance Corporation (LIC) policy becomes a viable option, it's crucial to understand the process and implications involved. Surrendering an LIC policy can provide you with newfound financial flexibility, which, in turn, allows you to reallocate funds to better suit your current circumstances.

In this article, we will take a look at the fundamental aspects of surrendering your LIC policy and explore the key considerations, benefits, and potential drawbacks. We will guide you through the steps involved in surrendering a policy, shed light on the surrender value calculation, and provide insights to help you make an informed decision.

By understanding the nuances of policy surrender, you can navigate this process effectively and make choices that align with your evolving financial goals.

Understanding What Policy Surrender Implies

LIC policy surrender refers to the decision to exit your LIC policy before it reaches maturity. The sum received in such a circumstance is known as the LIC policy surrender value. Once you proceed with the LIC policy surrender, you won't have the option to reinstate it at a later time.

It's important to note, however, that surrendering your LIC policy means you will not receive the original benefits, which are considerably higher than the surrender value.

How to Calculate the LIC Surrender Value?

When a policyholder makes the decision to withdraw their LIC policy, they do not receive the maximum returns. The amount provided, instead, depends on the surrender value, which is determined at the time of surrendering the policy. This calculation excludes additional bonuses, tax benefits, and premiums paid for rider cover.

To ascertain the surrender value, both the guaranteed surrender value and the special surrender value must be calculated. Subsequently, the higher value between the two is considered the surrender value of the LIC policy.

The guaranteed surrender value can be calculated using the following two methods -

Method I

Guaranteed Surrender Value = (Total value of premiums paid x GSV factor) + (Accrued bonus x GSV factor)

Method II

Guaranteed Surrender Value = [{(Number of premiums paid / Number of premiums payable) x Sum Assured} + Accrued bonus] x GSV Factor

LIC determines the GSV factor based on the year of surrender. A longer policy holding period leads to a higher GSV factor and vice versa.

It’s worth mentioning that an insurance company calculates the Special Surrender Value based on its own performance. In the case of good financial performance, the company may choose to offer a higher surrender value. The SSV factor, determined by the company, sets the specific amount when surrendering the policy. Similar to the GSV factor, the SSV factor also increases over time.

Payouts At the Time of Surrender

Discussed below are the two ways to surrender an LIC policy -

Guaranteed Surrender Value

The policyholder here is eligible to surrender their policy under the condition of a guaranteed surrender value only after a period of 3 years has passed. In other words, the premium must be paid for at least 3 years. If the policy is surrendered after the 3-year mark, the surrender value will amount to approximately 30% of the total premiums paid up until that point.

It's important to note that this calculation does not include the premium paid in the first year or any premiums paid for accidental benefit riders. Consequently, the longer the policy remains in effect before surrendering, the higher the surrender value provided by LIC.

Special Surrender Value

The special surrender value for LIC policies typically exceeds the guaranteed surrender value. Here's how it works -

  • If you have paid premiums for over 3 years, you are eligible to receive up to 80% of the sum assured at maturity.
  • If you have paid premiums for over 4 years but less than 5, you can receive up to 90% of the sum assured at the time of maturity.
  • If you have paid premiums for over 5 years, you are entitled to receive up to 100% of the sum assured at the time of maturity.

The maturity sum assured is determined based on the total premiums paid. Here’s how it is calculated -

(Maturity sum assured = Original sum assured x (number of premiums paid / number of premiums payable) + total bonus received) x surrender value factor.

The Right Time to Surrender the LIC Policy

Generally, there is a specific waiting period before a policy can be voluntarily terminated. This waiting period is calculated from the date of purchasing the policy and is determined by the policy's term and premium payment duration. The minimum waiting period varies in different scenarios, as explained below:

  • For single premium plans - In this case, the surrender of the policy is usually allowed from the second policy year onwards. Generally, surrender is not permitted during the first policy year.
  • For limited premium and regular premium plans - The duration of the waiting period depends on the policy term. If the policy term is 10 years or less, the waiting period is two years and the surrender can be initiated from the third policy year. 

For longer policy terms of 10 years or more, the minimum waiting period is three years - the policy can be surrendered from the fourth year onwards.

How to Surrender the LIC Policy?

In order to terminate a LIC policy, the policyholder needs to complete the following steps -

  • The policyholder must personally go to the nearest LIC branch and obtain a surrender discharge voucher also known as Form 5074.
  • Form 5074 must be filled out and submitted along with the necessary supporting documents.
  • After the submission of the form and documents, the company will initiate the process of surrendering the policy.
  • Once the surrender request is approved, the surrender value will be transferred to the policyholder's bank account.
  • Alternatively, instead of visiting the branch office, the policyholder can opt to send the surrender discharge voucher and relevant documents by courier to LIC's head office.

Documents Essential to Surrender an LIC Policy

Listed below are the mandatory documents to surrender an LIC policy -

  • Original policy documents
  • LIC surrender form - Form 5074
  • Bank account information
  • A cancelled cheque 
  • A written letter to LIC addressing the reason to discontinue the policy
  • A request for surrender value payment
  • LIC NEFT form
  • Identity proof

Alternatives to Surrendering a Policy

Surrendering a LIC policy carries negative consequences as it entails a loss of coverage and a significantly reduced surrender value. To prevent the need for surrendering, policyholders can use an alternative option - they can opt to convert the policy into a paid-up status.

A paid-up policy is characterised by the cessation of premium payments. In the case of a limited or regular premium policy, it can be converted into a paid-up policy if the premiums are discontinued without surrendering the policy. By converting to a paid-up policy, the coverage remains in effect. Here, the policy continues until the insured person's death or until it reaches maturity but at a reduced value.

The death and maturity benefits are reduced and referred to as paid-up values. If the policy is a participating policy, any future bonuses will not be declared. In the event of death, the paid-up death benefit would be provided. Alternatively, when the policy matures, the paid-up maturity benefit is paid out.

Distinction Between Paid-up Value and Surrender Value

Check out the table below to clearly understand the differences between paid-up and surrender values -

Surrender Value Paid-up Value
Here, the policy is terminated once you surrender it, i.e., the policy coverage stops. The policy continues even after it becomes paid up.
The surrender value is lower than the paid-up value. This amount is paid at the time of death or upon the maturity of the policy. The amount is higher than the surrender value.
The amount is paid instantly once you surrender the plan. This amount is paid as a death benefit or as a maturity benefit.

To know more about surrendering LIC policy, read through the following frequently asked questions section.

FAQ's

Q1. Why is it not recommended to surrender an LIC policy?

Ans: It is usually not advised to surrender an LIC policy due to many reasons. When you surrender the policy, you lose the ongoing coverage, not to mention that the surrender value is usually even lower than the amount you invested originally. Moreover, if you buy a policy as you grow older, the premium rate would increase.

Q2. Can you surrender your LIC policy online?

Ans: Yes, you can surrender your LIC policy online. However, for this you need to keep the following in mind-

  1. You can surrender the policy only after completing the 2nd purchase year (if a single-premium plan).
  2. The surrender tenure is of 2 years if the policy purchased has a period of less than 10 years.
  3. You need to submit all the documents stated by the Life Insurance Corporation of India.
Q3. Can you surrender a ULIP?

Ans: You can surrender a ULIP only after the policy completes the first 5 years of the tenure. Even if you surrender it before, the amount (the surrender value) will be paid after the first 5 years.

Q4. Does surrender value encompass the vested bonuses that LIC offers?

Ans: Yes, your surrender value includes all the earned bonuses (if they are already declared in the policy).

Q5. How much amount do you receive upon surrendering your LIC policy?

Ans: Assured surrender value is available only after your policy completes 3 years (if the policy tenure is more than 10 years). The surrender value is usually 30% of the premiums that you have paid (excluding the 1st year premium). If you surrender the policy after 4 to 5 years of completing the policy, the assured surrender value can go up to 50%.

More From Investment
Recents ArticlesPopular Articles