At least once a month, I receive a call from a policyholder who wants to surrender their LIC policy because they need money urgently or because someone told them they could get better returns elsewhere. My first response is always: let us calculate exactly what you get if you surrender, because in most cases, the surrender value is significantly less than what the policyholder expects.
What is Surrender Value? Surrender value is the amount LIC pays you if you choose to terminate the policy before its maturity date. It is always less than the total premiums paid (especially in the early years) and far less than the maturity benefit you would have received. According to IRDAI guidelines, a policy acquires surrender value only after premiums have been paid for two full years, if you stop before that, you get nothing back.
Types of Surrender Value
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Guaranteed Surrender Value (GSV): the minimum LIC is legally required to pay. It is 30% of total premiums paid (excluding the first year premium and any rider premiums), multiplied by the remaining policy term divided by the total policy term. This percentage rises as the policy ages but never reaches 100% of premiums paid.
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Special Surrender Value (SSV): typically higher than the GSV. The SSV considers the paid-up sum assured plus any vested bonuses, reduced by a factor based on the remaining term. LIC pays the higher of GSV or SSV.
| Feature | Guaranteed Surrender Value (GSV) | Special Surrender Value (SSV) | |---|---|---| | Calculation base | Total premiums paid (excluding GST and riders) | Paid-up sum assured plus accumulated bonuses | | Minimum payout | Fixed percentage scale | Depends on paid-up value and remaining term | | Typical outcome | Usually lower in early years | Usually higher in later years |
Worked Example
A policyholder who has paid Rs 30,000 per year for 10 years in a 25-year Jeevan Anand (Rs 10 lakh sum assured). Total premiums paid: Rs 3 lakh. GSV at this point: approximately Rs 1.35 to 1.6 lakh. Maturity value if continued: approximately Rs 21 to 24 lakh. By surrendering, this person gives up Rs 21+ lakh to receive Rs 1.6 lakh. This is almost never the right decision.
Is Surrender Value Taxable?
If you surrender within the first five years, the surrender value is added to your income and taxed at your slab rate. If you surrender after five years, it is usually tax-free under Section 10(10D), subject to conditions on the premium-to-sum-assured ratio.
When is surrender justified? I tell clients that surrender is only justifiable if you genuinely cannot afford to continue the premiums AND the paid-up policy option is not available. Even then, taking a loan against the policy is often better than surrendering.
Loan against Policy: LIC offers loans against policies after 2 to 3 years of premiums. The loan amount is up to 90% of the surrender value. Interest is approximately 9% to 10% per annum, and it is adjusted against the policy payouts rather than demanded immediately, so your life cover stays active. This is a much better option than surrendering if you need temporary funds.
Making the policy paid-up is the other alternative: stop paying premiums without surrendering, and the policy continues with a reduced (paid-up) sum assured instead of terminating. You keep your accumulated bonus and some life cover instead of losing both.
FAQ
How long does the surrender process take? Once you submit the discharge form and policy bond at the branch, it takes about 7 to 10 working days for the money to reach your bank account.
Can I surrender online? No. You can estimate the value using our calculator, but the surrender form must be submitted physically at your home LIC branch.
Can I revive a policy after surrendering it? No. Once a policy is surrendered and paid out, it is terminated permanently.
If you are considering surrendering your LIC policy for any reason, please call me first at 9415313434. I will calculate the actual surrender value versus maturity value and help you make the right decision.
Use our free Surrender Value Calculator to calculate your own numbers.
