Lic Surrender Value

 

LIC Surrender Value: Everything You Need to Know

Life Insurance Corporation of India (LIC) is one of the most trusted insurance providers in India. Many policyholders, for various reasons, may choose to surrender their policies before maturity. In such cases, they receive a surrender value, which is the amount paid by LIC upon termination of the policy before its completion. This article provides a detailed explanation of LIC surrender value, its calculation, types, factors affecting it, and whether surrendering a policy is the right decision.

What is LIC Surrender Value?

The surrender value is the amount a policyholder receives from LIC when they decide to terminate the policy before its full term. However, surrendering a policy comes with certain financial implications, as the surrender value is often lower than the total premiums paid.

There are two types of surrender values in LIC policies:

  1. Guaranteed Surrender Value
  2. Special Surrender Value

Each type has different calculations, which we will explore in detail below.

When Can a LIC Policy be Surrendered?

A LIC policy can only be surrendered after it has acquired a surrender value. Most LIC policies acquire a surrender value after the completion of at least three years of premium payments. If a policyholder discontinues the policy before this period, no surrender value is provided.

Types of LIC Surrender Value

1. Guaranteed Surrender Value (GSV)

The Guaranteed Surrender Value is a fixed percentage of the total premiums paid (excluding taxes, rider premiums, and extra premiums). The percentage varies depending on the number of years the policy has been in force.

Guaranteed Surrender Value Formula:


\text{GSV} = \left( \text{Total Premiums Paid} - \text{First-Year Premium} \right) \times \text{Guaranteed Surrender Value Percentage}

The Guaranteed Surrender Value percentage is generally:

  • 30% of total premiums paid after three years
  • 50% of total premiums paid after five years
  • Higher percentages for longer policy durations

Example:
If a policyholder has paid ₹1,00,000 in premiums over five years and the first-year premium was ₹20,000, the GSV calculation would be:


\left( 1,00,000 - 20,000 \right) \times 50\% = 80,000 \times 50\% = ₹40,000

2. Special Surrender Value (SSV)

The Special Surrender Value is typically higher than the Guaranteed Surrender Value. It depends on the policy type, term, and the number of years premiums have been paid.

Special Surrender Value Formula:


\text{SSV} = \text{Paid-Up Value} \times \text{SSV Factor}

Where:

  • Paid-Up Value = (Sum Assured × Number of Premiums Paid) ÷ Total Number of Premiums Payable
  • SSV Factor is determined by LIC based on the policy term and remaining years.

Example:
If a policy has a sum assured of ₹5,00,000, and the policyholder has paid premiums for 6 years out of 20, the Paid-Up Value would be:


\left( 5,00,000 \times 6 \right) ÷ 20 = ₹1,50,000


1,50,000 \times 0.40 = ₹60,000

Factors Affecting LIC Surrender Value

Several factors influence the surrender value of a LIC policy:

  1. Policy Duration: The longer a policyholder continues paying premiums, the higher the surrender value.
  2. Premium Payment Term: Policies with longer premium payment terms tend to have better surrender values.
  3. Type of Policy: Endowment and money-back policies typically offer better surrender values than term policies.
  4. Bonuses: If the policy has accumulated bonuses, they may be included in the surrender value calculation.
  5. SSV Factor: LIC decides the SSV factor based on actuarial calculations.

Advantages and Disadvantages of Surrendering a LIC Policy

Advantages

  • Immediate liquidity: Helps in urgent financial needs.
  • Stops future premium payments.
  • Useful when the policy is no longer aligned with financial goals.

Disadvantages

  • Loss of benefits: The surrender value is lower than the total premiums paid.
  • No life cover: The policyholder loses the death benefit.
  • Reduced savings: LIC policies often have built-in savings components, which are lost on surrender.

Alternatives to Surrendering a LIC Policy

If a policyholder is unable to continue paying premiums, they can consider the following alternatives:

  1. Convert to a Paid-Up Policy: Instead of surrendering, the policy can be converted into a paid-up policy, where no further premiums are required, but the sum assured is reduced proportionally.
  2. Take a Policy Loan: LIC allows policyholders to take a loan against their policy, using the surrender value as collateral.
  3. Revival of Lapsed Policy: If the policy has lapsed due to non-payment of premiums, it can often be revived within a specified period.

Should You Surrender Your LIC Policy?

Surrendering a LIC policy should be the last resort. Consider the following before making a decision:

  • If financial difficulties are temporary, a policy loan or paid-up policy might be better alternatives.
  • If the policy no longer fits financial goals, explore policy portability or investment alternatives before surrendering.
  • If the policy has bonuses, surrendering could result in loss of accumulated benefits.

Conclusion

Surrendering a LIC policy means terminating the coverage in exchange for a payout, but it comes at the cost of reduced returns and loss of insurance benefits. The surrender value depends on factors like the duration of the policy, premiums paid, and LIC’s internal calculations. Before surrendering, policyholders should weigh the financial impact and explore alternatives like policy loans or converting to a paid-up policy.

Careful financial planning can help avoid the need to surrender a policy, ensuring both life coverage and long-term savings.

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