8 factors to consider before you surrender your LIC policy
Life insurers typically have an option where customers can surrender their traditional insurance policies in exchange for a surrender value. This is to ensure that customers don’t lose out the entire amount if they no longer wish to or afford to continue with the policy. India’s largest life insurance company Life Insurance Corporation of India (LIC) allows policyholders to surrender their policies if they have paid premiums for at least three years continuously. Since term insurance covers do not have any maturity value, this surrender option does not apply to term covers.
Though surrendering option is offered for all life insurance policyholders, it is not an option commonly recommended for investors. This is mainly because policyholders lose out on a significant part of their premiums when they surrender a policy. This should be considered as a last resort when all other options are exhausted.
Before you proceed with surrendering your policy, you need to consider these 8 factors to understand the impact of surrendering your life insurance cover.
Surrender value
This is the most important factor to be considered when you are planning to surrender your LIC policy. You need to check the surrender value of the policy for the specific term during which you plan to surrender it. If you are surrendering your policy immediately after three years, the guaranteed surrender value you can get is just 30% of the premiums paid excluding the first-year premium. In this case, you might lose a lot of money by surrendering your cover. LIC considers various factors including the economic environment while deciding the surrender value on a case-by-case basis.
Fees and charges
Most insurers in the market charge additional fees for surrendering a policy. LIC also has surrender charges on various life insurance covers. You need to check out these charges in advance before surrendering a policy. In most cases, companies provide details about these charges in the policy document. If you cannot find information about these charges, you need to check with the insurer’s customer care department. With full information about the additional fees and charges, you can understand how much you stand to lose from surrendering the policy.
Existing life insurance coverage
If you are surrendering a life cover, make sure you are adequately covered through other life insurance covers. This is certainly a factor worth considering before you surrender a policy. If you are not adequately covered, you need to rethink your decision about surrendering a policy. Even if you don’t have any investment-oriented covers, you need to have adequate protection in the form of term insurance coverage. This is to ensure that your loved ones are financially protected in case of your unexpected demise. If you are surrendering to buy a better life cover, you need to buy that first before surrendering your existing plan.
Lock-in period for ULIPs
If you have a unit-linked insurance plan (ULIP), you must be aware of the lock-in period associated with it. Typically, most ULIPs have a lock-in period of 5 years. During this period, you cannot surrender or withdraw from this policy without incurring heavy penalties. If you are just a year or two away from completing the lock-in period, it is not a good idea to surrender your LIC policy at this stage. Make sure that you pay your remaining premiums and complete the lock-in period. If you are no longer able to pay the premiums, you need to check with the company and explore your available options.
Conversion to paid-up policy
If you are not able to afford premiums anymore, you might want to think about converting your LIC cover into a paid-up policy. This is possible only if you have paid premiums for at least three continuous years. A paid-up policy is one that continues to remain active till the end of the policy term even if you have stopped paying premiums. Here, the maturity benefit you receive at the end of the policy term is proportional to the premiums paid. This could be a good option if you are not in a hurry to get back your invested premiums.
Better investment opportunity
If you are surrendering your policy to invest in a better opportunity, you need to do a quick cost-to-benefit analysis to make sure that the returns from the new investment are good enough to cover your losses from the surrender. There are multiple options when it comes to investing your money for future growth. If you are surrendering for the sole purpose of better investments, you need to explore the credibility of that investment opportunity. Make sure that you calculate your returns properly before surrendering your life cover.
Policy term and premium payment term
When you are planning to surrender your policy, it is a good idea to take the policy term and premium payment term into consideration. If your premium payment term is close to completion, surrendering your policy may not do much good to you. Here, it is better to complete the premiums and then explore your options. When you finish your premiums, you can get the maturity sum assured amount rather than the surrender value.
Affordability
When you subscribe to a policy, you must make sure that you can afford to pay the annual premiums every year without fail. If you cannot afford to pay the premiums anymore, you need to explore other options before surrendering the cover. It is not a good idea to pay the premiums with your credit card and accumulate debt. It is better to discuss this with a company agent before you think about surrendering.
Conclusion
Surrendering a LIC policy involves plenty of additional expenses, and it must be considered only if there is no other choice. The surrender option is provided mainly to make sure that people do not get stuck with a policy if they have chosen it by mistake. Hence, it is necessary to consider all the pros and cons before you buy a life insurance cover. With proper planning, you can avoid a situation where you have to surrender your life cover.
The author is. Financial Analyst at Farmer’s Insurance
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