Most traditional LIC policies neither offer large life insurance cover nor decent investment returns. And it is for this reason that many LIC policyholders want to know How to Surrender LIC policy before Maturity OR How to Surrender LIC Policy after 3 years OR How to Surrender LIC Policy after 5 years in India (2023)?
Most LIC policyholders just purchase some LIC policy sold to then via some LIC uncle or friend in the family at the start of their careers. Generally forced and socially pressurized to buy LIC policy as investment-cum-insurance and for tax-savings.
But no matter what your LIC agent tells you (and mind you his future commissions depend on you staying invested in LIC), the fact is that investments that have an insurance component in them like traditional plans namely endowment plans, money-back plans, etc. are most unlikely to generate good returns which you can easily get from other simpler instruments like EPF & PPF, and equity mutual funds. As for the life insurance, better buy a term plan.
I have many clients who come to me for financial planning and then have questions like –
- Should I surrender my LIC policy?
- Should I surrender my LIC policy now and instead invest in mutual funds?
- Will I get more returns if I surrender LIC policy and invest surrender amount and future premiums in mutual funds?
- Should I surrender my LIC policy, buy a term plan and then invest the money in mutual funds?
So let us see how to How to Surrender LIC policy before Maturity? OR How to Surrender LIC Policy if you have already paid premium for 2/3/5 years but now want to exit the policy?
What does Surrendering LIC Policy mean?
When you decide to surrender your LIC policy before maturity, it means that you want to prematurely exit from LIC’s insurance product before maturity. So you will now get an amount called as Surrender Value.
To become eligible for surrendering a policy and the policy to have some surrender value, a regular premium LIC policy with term of more than 10 years should have had the premiums paid continuously for at least 3 years. If the premium payment term is less than 10 years, then the premiums should be paid regularly for a minimum of 2 years. This is as per IRDA’s Non-Linked Insurance Products Regulations, 2013. So that is your answer to question of when does my LIC insurance plan acquire surrender value?
And for any reason if you stop paying the policy premiums before the plan acquires surrender value (either 2 or 3 years as per policy term), you won’t get anything back. That is, there will be zero surrender value.
Now let’s see different types of surrender values and how to calculate them.
Different Types of Surrender Values in LIC Policy
In LIC policy, there are 2 types of surrender values.
Guaranteed Surrender Value (GSV)
Once you have completed 2-3 years of premium payment and your LIC policy is eligible for a surrender value, then the first type of surrender value of such policy is the Guaranteed Surrender Value.
Generally, the Guaranteed Surrender Value (or GSV) for LIC plans is 30% of the premiums paid, excluding the 1st year premium. It also excludes any additional premium paid for riders, taxes, etc.
However, the actual percentage of this Guaranteed Surrender Value depends on the LIC Policy Term and the policy year in which the policy is being surrendered. Let us say you decide to Surrender your LIC New Jeevan Anand policy. Your LIC policy term is 30 years but you now want to surrender it in say 12th year.
So we look at the Surrender Value Table of LIC New Jeevan Anand (image below from link):
As we can see, the Guaranteed Surrender Value (GSV) for 30 year term and 12th year surrender is 56.82%. But let’s say if you decided to surrender earlier say in the 7th year, then the GSV would have been lower at 50%.
If you look at the table above, you can make out that the surrender penalty (and not surrender value) is quite heavy in the initial years and goes down as the time passes. This is obviously to incentivize LIC policyholders to continue with the policy and keep paying premium for their policies for longer periods and preferably up to maturity.
This is one type of surrender value. There is another one though.
Special Surrender Value (SSV)
The Special Surrender Value is the % of Total Paid-up Value of the policy. It is calculated as = (Sum Assured * (No. of premiums paid / No. of premiums payable) + total bonuses received) * Special Surrender Factor or SSF. To put it simple, the Special surrender value is calculated by simply adding paid up sum assured and all the accrued bonuses (based on LIC bonus rates) and the multiplying the sum with special surrender factor . This Surrender Value Factor changes based on the type of LIC policy, term of the policy and several other factors.
Generally it is zero for the first 3 years. But to find our the SSV for any given year, you need to check with LIC as the details are not made available easily by LIC. You can even call the LIC customer care or if you have a LIC Office nearby, then you can visit the nearest branch of LIC to find the exact value. You can also try to ask your LIC agent for the same. Be ready to face lots of pursuing you about why not to surrender by them.
Note – There is no surrender value for any extra riders that you may have added to your LIC policy.
Related Reading – How to Calculate LIC Bonus Amount on your LIC policies?
How Is LIC Surrender Value Calculated (2023)?
The final surrender value of LIC policy can be calculated higher of the following two surrender values:
- Guaranteed Surrender Value (based on LIC Guaranteed Surrender Value table for the LIC policy you have)
- Special Surrender Value is calculated as Sum Assured x (Premiums Paid/Premiums Payable) + Total Bonus accrued) x Surrender Value Factor
That is how one can understand the Calculation of Surrender Value Using LIC Surrender Value Calculator for your LIC policy (2023)
Surrendering a policy means you end the policy immediately and you get the surrender value paid out immediately without any further delays or premium payments.
But there is another option.
As you would have seen if you surrender the LIC policy, you will lose a lot of money due to calculation of surrender value using surrender factor tables. But what if you don’t want to take the loss now? And what if you could stop paying the premium as well?
This is the Paid Up option of LIC policy.
Making LIC policy Paid Up – Alternative to Surrender
Under this option, instead of surrendering, you make the a policy paid-up. This means that you can stop paying premiums. But your policy still continues and covers you for the remaining policy term, but with reduced sum assured. At the end of the policy duration and maturity, the paid up policy amount is paid to the policyholder.
How much does the sum assured get redudced in paid up policies? The sum assured is reduced to a proportionate amount based on the number of premiums paid versus number of premiums payable.
For example, lets say that the Sum Assured is Rs 20 lakh and the total number of premiums payable is 16 (annual premiums for 16 years). Now you decide to make the policy paid up and stop paying the premiums after 8 years. In this case the paid up value will be (8/16) x Rs 20 lakh = Rs 10 lakh.
Now you don’t have to pay any premiums from 9th to 16th year as the policy is paid up. Your policy still provides a cover of Rs 10 lakh.
On maturity in 16th year, you are paid reduced sum assured plus any bonus already accrued up to the 8th year. Any other Bonuses declared by LIC in future, i.e. after making the policy paid up which is the 8th year in the example, your policy will not eligible for such future bonus additions
LIC policy Surrender Value Taxation (2023)
Do you have to pay tax on surrender value of LIC policy or not?
If you have paid 2 or more premiums in a traditional LIC policy, then any amount received on policy surrender will not be taxable in your hands.
But this is subject to the Life insurance taxation rules under Section 10(10D) which says that the policy payouts are only tax-free if the Sum Assured is at least 10 times the annual premium amount. If your policy does not fulfill this criterion, it is fully taxable in any case.
In case of single premium policies, for the policy surrender value to be tax-free, the policy has to be held for a minimum of 2 years. And then again the taxation condition under Section 10(10D) has to be checked.
When you are filing your Income Tax returns, the surrender value should be shown in it. If the surrender value is taxable, then it should be shown under Income from Other Sources.
And do you have to reverse the tax benefits taken under Section 80C if you surrender the LIC policy?
If you have held the policy for 5 years from the date of purchase, then you do not have to reverse any benefits that you took under Section 80C of the IT Act, 1961. However, if the holding period is less than 5 years, then you will have to revise your past income tax returns and pay any additional taxes, if any, for those years. Note that we talking about holding period and not the premium payment period.
How to Surrender LIC Policy Online (2023)?
If you have decided to surrender your LIC policy, then so be it. Now get going. Surrendering LIC policy is not possible online nowadays. Also, you need to go to the agent or the servicing LIC branch to surrender your LIC policy.
You will need following documents for surrendering LIC policies:
- Original Policy Bond
- Download LIC Policy Surrender Form No. 5074
- Cancelled bank cheque or copy of your bank account passbook. Needed as LIC now issues the payment directly to beneficiary bank account.
- If you are not using the surrender form, then instead fill LIC’s NEFT Form, if you are not using the above said Surrender Form and submit the same.
- You will also need original and copies of ID Proof like Aadhaar, PAN or Driving License.
- Once you submit the necessary documents and surrender application, you should get back your surrender amount from LIC New Jeevan Anand in about 10 days time and the amount will be transferred directly to your bank account.
If you search for surrender value on LIC website, what you get to read in the Policy Guidelines section (link) is obviously LIC trying to dissuade people from surrendering the policy. While LIC is correct in its own right, the best approach is not to buy any of LIC traditional insurance policies.
If you have doubts about whether you should surrender or not, then better would be to first take some time out and go through the LIC policy documents first. Read in detail about the ‘Surrender’ clause in the detailed ‘Terms and Conditions’ section. It is usually a separate point and should not be difficult to find. The clause would have details on both the things – when can the policy be surrendered (after how many years) and what will be the surrender value.
So that was about How to Surrender your LIC Policy before maturity and also, How to Surrender your LIC Policy after 3 years and How to Surrender your LIC Policy after 5 years in India. If you have doubts whether it is feasible in your unique case or not, please get in touch with a SEBI registered Investment Advisor.
Disclaimer – The views expressed above should not be considered professional investment advice or advertisement or otherwise. The article is for general educational purposes only. The readers are requested to take into consideration all the risk factors including their financial condition, suitability to risk-return profile and the likes and take professional investment advice before taking any financial decisions or actions which may have financial implications now or in future.