Surrender LIC policy before maturity
Is it OK to surrender your LIC policy before the maturity?
Life insurance acts as a financial cover in case of a contingency linked with the policyholder’s life. Contingencies such as death, disability, accident, etc. Be it due to natural cause or accidental, we are subject to risks of death and disability, and having a life insurance policy helps financially if anything happens to the policyholder.
Surrendering means to stop your life insurance policy before its time of maturity. When you have brought your LIC policy from a trusted insurance advisor, chances are very unlikely of surrendering the policy. You would have brought the policy after an informed decision.
In unlikely situations, while liquidating investments to bridge the gap in cash flows work better than taking up new loans, surrendering your life insurance policies may not always make sense. We tell you when you should consider this option.
If a policyholder surrenders their policy before the maturity date/lock-in period, they need to pay surrender charges. The charges vary depending on the type of the policy, the premium paid and the total premium paying term.
Understand that surrendering your policy after the free-look period—usually 15 days after you’ve received the policy documents—could mean bearing some costs. A policyholder will only be able to surrender his/her policy after having paid the premiums diligently for 3 years.
When can the policy be surrendered?
Usually, there is a minimum period after which the policy can be surrendered. This minimum period is calculated from the date the policy is bought. The period depends on the term of the policy and the premium paying term. The usual minimum period under different instances is as follows –
- Under single premium plans– under single premium plans surrender can be done from the second policy year itself. No surrender is usually allowed in the first policy year.
- Under limited premium and regular premium plans –under limited and regular premium plans, usually, the policy term is taken into consideration. If the policy term is 10 years or below, the duration is two years. Surrender can be done from the third policy year. In case of longer tenures of 10 years and up, the minimum duration is 3 years. The policy can be surrendered from the 4th year onwards.
Keep in mind that surrendering a policy will make you loose all the advantages associated with the insurance policy and you as the policyholder will also get back lesser money as surrender value than the amount invested as premiums. Hence, do not surrender your policy unnecessarily.
What happens when the policy is surrendered?
When the LIC policy is surrendered, the following things happen –
- The coverage stops immediately
- The surrender value is paid to the policyholder
- The policy cannot be revived in future
- All benefits of the policy cease to apply
Moreover, the surrender value paid would be very low compared to the total premiums paid by the policyholder. Policyholder will get back 30% of the premiums paid if surrendered after 3 years. Between 5 to 7 years of the policy it is around 50%. You will get up to 90% of premiums paid, if you surrender the policy in the last 2 years of the policy
How to surrender LIC policy?
To surrender a LIC policy, the policyholder must take the following steps –
- The policyholder should visit the home branch where the LIC policy was registered and avail a surrender discharge Form 5074 (available in the branch).
- The form should be filled and submitted with the relevant documents i.e. Original Policy bond, ID proof, Cancelled cheque or bank statement of the policy holder.
- Once the form and the documents are submitted, the company would process the surrender of the policy.
- Once the surrender request is accepted, the surrender value would be credited to the bank account of the policyholder.
This process usually takes 3 to 4 business days.
An alternative to policy surrender is policy paid up. Let us look at the benefits
- What is a paid-up policy?
A paid-up policy is one in which the premiums have been discontinued. A limited or regular premium policy can be made paid-up if the premiums are discontinued but the policy is not surrendered. When the policy is made paid-up, the coverage does not stop. The policy continues to run until death or maturity at a reduced value. The death and maturity benefits are reduced and are called paid-up values. If the policy is a participating policy, future bonuses are not declared. In case of death, the paid-up death benefit is paid. Alternatively, when the policy matures, the paid-up maturity benefit is paid.
- When can the policy be made paid-up?
Similar to the minimum period applicable for surrendering the policy, there is a minimum period after which the policy can be made paid-up. Moreover, to make the policy paid-up, premiums must be paid over the minimum duration. The minimum duration is, usually, two or three policy years, depending on the term of the policy and the premium paying term.
The policy continues to run after it is made paid-up. The coverage, therefore, continues
The policy is terminated once it is surrendered. The coverage, therefore, stops.
The paid-up value paid on death or maturity is higher than the surrender value
The surrender value is paid is always lower than the paid-up value
The paid-up value is paid either on death or on maturity
The surrender value is paid immediately when the plan is surrendered