LIC Surrender Value: How It Is Calculated and When to Surrender

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.

Types of Surrender Value:

1. Guaranteed Surrender Value (GSV): LIC policies acquire a surrender value after two years of premiums have been paid. The GSV is 30% of total premiums paid (excluding the first year premium and any extra premiums for riders) multiplied by the remaining policy term divided by the total policy term. This is the minimum LIC must pay.

2. Special Surrender Value (SSV): LIC also calculates a Special Surrender Value, which is 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.

Practical example: A policyholder who has paid ₹30,000 per year for 10 years in a 25-year Jeevan Anand (₹10 lakh sum assured). Total premiums paid: ₹3 lakh. GSV at this point: approximately ₹1.35 to ₹1.6 lakh. Maturity value if continued: approximately ₹21 to ₹24 lakh. By surrendering, this person gives up ₹21+ lakh to receive ₹1.6 lakh. This is almost never the right decision.

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 3 years of premiums. The loan amount is up to 90% of the surrender value. Interest is approximately 10% per annum. This is a much better option than surrendering if you need temporary funds.

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.