How to surrender LIC policy before maturity?

The Life Insurance Corporation of India (LICI) offers a range of life insurance plans. These plans come with a range of policy tenures so that individuals can choose a coverage term as per their requirement. Once the term is selected, the policy runs for the chosen term providing life insurance coverage. But what if the policyholder wants to close LIC policy before the chosen tenure comes to an end? Can it be done?

Yes, it is possible for policyholders to close their LIC policy before the term is complete. This closing is called surrendering. Let’s understand the meaning of surrender of LIC plans and how such surrender can be done –

What is surrendering of a LIC policy?

Surrendering of a LIC policy means giving up the policy before the term of the policy is over. The policyholder can opt to surrender the policy any time that he/she wants to. When the policy is surrendered, the company pays the surrender value and the coverage is terminated.

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.

What is paid in case of surrender?

As stated earlier, when the policy is surrendered, the surrender value is paid. The surrender value is determined to be the higher of the Guaranteed Surrender Value or the Special Surrender Value. Let’s understand these two concepts in details –

• Guaranteed Surrender Value (GSV) – Guaranteed Surrender Value is the surrender value which is guaranteed under the plan. This value is calculated using either of the following two formulas –
  GSV = (Total value of premiums paid * GSV factor) + (Accrued bonus * GSV factor)
  OR
  GSV = [{(Number of premiums paid/Number of premiums payable) * Sum Assured} + Accrued bonus] * GSV FactorThe GSV factor is determined by LIC. It depends on the policy year in which the policy is surrendered. The later the policyholder surrenders the policy the higher would be the GSV Factor. For instance, in a 20-year policy, the GSV factor would be higher if the policy is surrendered in the 15th policy year than if the policy is surrendered in the 10th policy year.
• Special Surrender Value (SSV) –
  Special Surrender Value is the surrender value which is calculated by the company depending on its performance. If the company is making profits in the past financial years, it can offer a higher surrender value than the Guaranteed Surrender Value. Calculation of the Special Surrender Value is done based on the SSV factors specified by the company. The SSV factor, in turn, depends on the company’s performance and is specified at the time of surrender of the policy. Just like GSV factor, SSV factor also increases with time. If the policy is surrendered in later policy years, the factor would be higher and vice-versa.

How to surrender LIC policy?

To surrender a LIC policy, the policyholder must take the following steps –

• The policyholder should visit the nearest branch of LIC and avail a surrender discharge voucher. The Surrender Discharge Voucher is called Form 5074.
• The form should be filled and submitted with the relevant documents.
• 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. 
• Instead of visiting the branch office, the policyholder can also courier the surrender discharge voucher along with the relevant documents to LIC’s head office. The address is Yogakshema Building, Jeevan Bima Marg, P.O. Box No – 19953, Mumbai – 400 021

Documents required for surrendering the policy

The following documents would be required if the policyholder wants to surrender the policy – 

• Surrender discharge voucher – Form 5074
• Application for surrendering the policy
• NEFT Mandate form to allow the surrender value to be credited to the policyholder’s bank account
• Copy of PAN Card
• The original policy bond
• A cancelled cheque for furnishing the company with the bank account details of the policyholder 

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.

Alternative to surrendering the policy – making the policy paid-up

The implications of surrendering a LIC policy are negative. The policyholder cannot enjoy coverage after the surrender and the surrender value is also very low. So, to avoid surrendering the policy, the policyholder has another alternative. This alternative is to make the policy paid-up. Let’s understand what paid-up is and how it works –

• 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.
• How is the paid-up value calculated?
  Calculation of the paid-up value is done using the following formula –
  Paid-up value = (Number of premiums paid/Number of premiums payable) * Sum Assured
  If the policy is a participating policy which earns the bonus, the vested bonus earned before the policy was made paid-up is added to the paid-up value. The aggregate value is then called the total paid-up value. So, the total paid-up value would be calculated using the following formula –
  Total paid-up value = {(Number of premiums paid/Number of premiums payable) * Sum Assured} + Accrued bonuses

Difference between paid-up value and surrender value

Paid-up value is different from surrender value in the following aspects –

Making the policy paid-up is a better option than surrendering the policy. A paid-up policy promises a benefit on death or maturity which is not promised under surrender. The policyholder should, therefore, understand the difference between paid-up and surrender and make an informed choice.