Many of us buy LIC policies without knowing features and benefits. However, after few days we feel such LIC policies are irrelevant. Hence, we want to get rid of such policies. The solution is to surrender such LIC policies. How to Surrender LIC Policy after 3 years or before maturity?
What is the meaning of Surrender of Life Insurance Policy?
It is the option to exit from life insurance product before maturity wherein policyholder will get the amount which is called as Surrender Value. A regular premium policy will be eligible for surrendering after the policyholder has paid the premiums continuously for 3 years.
As I said, to be eligible for surrender the policy must complete 3 years. By surrendering LIC policy, you may not be in profit as they pay you some part of the total accumulated bonus and the premium you paid.
Implications after the Surrender LIC Policy
# You will loose the Life Insurance Protection available from the policy. As surrender of LIC policy is considered as the closure of the contract between you and insurance company.
# Tax Benefits availed under Sec.80C of IT Act will be reversed if the policy is terminated/cease to be in force within 2 years for traditional products and 5 years for ULIP products after the date of commencement of policy.
Refer the taxation of Life Insurance Policies at “Tax Benefits of Life Insurance“.
Types in the Surrender LIC Policy
There are two types of Surrenders. Let us discuss both the types.
1) Guaranteed Surrender Value
If your policy is eligible for this surrender value then it to be mentioned in the policy bond and is payable after the completion of 3 years. It is usually 30% of the premiums paid, excluding premium for the first year. It also excludes any additional premium paid for riders, taxes and any bonus that you may have received from the LIC.
However, the percentage of this Guaranteed Surrender Value will depend on the Policy Term and policy year in which the policy is surrendered.
Let us say your yearly premium is Rs.1 Lakh and you paid it for 4 years.
Total Premium Paid=Rs.4 lakh.
Premium excluding 1st year=Rs.3 lakh.
Then the Guaranteed Surrender Value will be 30% of the Premiums Paid (excluding 1st Year Premium). Hence, 30% of Rs.3,00,000 will be Rs.90,000 is what you get.
Remember, this Guaranteed Surrender Value will not add the already accrued bonus.
2) Special surrender value
It is calculated as below. But before that, you must understand one more term called Paid Up Value.
What is the meaning of Paid Up Value and Total Paid Up Value?
If premiums have been paid for at least three consecutive years and any subsequent premium has not been paid within the grace period, then such lapsed policies are called paid up policies. The sum assured is reduced to a proportionate sum assured which was available during the policy buying.
For example, if Sum Assured is Rs.5 lakh and the total number of premiums payable is 20 years and premium payable is yearly and let us say premiums are paid for 10 years. After that, you discontinue the policy.
Such discontinued policy is called paid up policy. This is calculated as below.
Paid Up Value=(No. of Premiums Paid/No. of Premiums Payable) * Sum Assured.
Paid Up Value=(10/20) * Rs.5 lakh=Rs.2,50,000.
So from the 11th year, the policy will continue with sum assured of Rs.2,50,000 only instead of original Rs.5,00,000. Along with this paid up sum assured the bonus already accrued up to the 10th year will be added. This is called Total Paid Up Value. Therefore Total Paid Up Value=Paid Up Value+Accrued Bonus.
If LIC declares any future bonus or guaranteed additions to the product, then your policy is not eligible for such future bonus or GA. You will receive only the Total Paid Up amount at maturity or death of policyholder.
Total Paid Up Value will be payable to you at maturity or your nominee (if your death occurs during the policy period).
What is the meaning of Special Surrender Value?
In simple terms, Special Surrender Value is the % of Total Paid-up Value and it is calculated as below.
Special Surrender Value=(Sum Assured * (No. of premiums paid/No. of premiums payable) + total bonus received)* surrender value factor.
In simple, Special Surrender Value=Total Paid Up Value*Surrender Value Factor.
This Surrender Value Factor changes based on the term of the policy and many other things. Usually, this value is zero for the first 3 years. Hence, for the particular year and for your policy, you have to check with LIC for this data.
What is the difference between Paid Up Value and Surrender Value?
I created below table for your understanding of the difference between the meanings of Paid Up Value and Surrender Value.
Hope you now understood the concept of Paid Up Value, Total Paid Up Value and Surrender Value.
How to Surrender LIC Policy?
First keep in mind that as of now Surrendering LIC policy is not possible ONLINE. Also, you have to surrender the LIC policy at your servicing LIC branch ONLY. Servicing branch may be the branch where you purchased the policy. Otherwise, if you changed the branch, then that particular LIC branch represent the servicing branch for you. The reason for this is, your all policy documents like proposal forms, loan details and all other details will be available at servicing branch only.
Also, keep in mind that you have to personally visit the branch and request for surrender of LIC policy.
Documents Required for Surrender LIC Policy
- Original Policy Bond
- Download LIC Policy Surrender Form No.5074. Take the printout and go with this form.
- Bank cancelled cheque leaf (your name should be printed on cheque) or bank passbook photocopy. Because now LIC issue the payment directly to beneficiary bank account. LIC stopped issuing cheques.
- Fill LIC’s NEFT Form, if you are not using the above said Surrender Form and submit the same.
- Go with original ID Proof like Aadhaar, Driving License or PAN Card. They verify and take the photocopy of the same and return the original one.
Once you submit the necessary documents, then within 5-10 days they transfer the fund to your bank account.