How to Surrender LIC Policy: Step-by-Step Guide

Thinking of surrendering your LIC policy to access cash or stop unaffordable premiums? The process to surrender an LIC policy can involve an early-exit loss, the end of life cover, and possible tax consequences. 

This guide explains the entire process, the required documents, the surrender value, the tax implications, and alternatives.

When Should You Consider Surrendering Your LIC Policy?

You may consider surrendering your LIC policy if:

1) Financial Emergency Requiring Immediate Funds: If you're facing a genuine financial emergency and need immediate funds, surrendering your LIC policy may help. However, compare the surrender value with alternatives like a policy loan, which lets you access funds without permanently ending your life cover.

2) Premiums Have Become Unaffordable: If paying premiums has become difficult, surrendering isn't your only option. Converting your LIC policy into a paid-up policy lets you stop paying future premiums while retaining a reduced life cover and any vested bonuses, subject to the policy terms.

3) Your LIC Policy Was Mis-Sold or No Longer Meets Your Needs: If your policy was mis-sold and you've crossed the free-look period, or it no longer aligns with your financial goals, surrendering may be worth considering. Before proceeding, compare the surrender value with the benefits offered by a more suitable policy.

4) You Have Found a Better Insurance Plan: If you've found a policy that offers better coverage, features, or premiums, surrendering your LIC policy may make sense. Ensure your new policy is issued and active before surrendering your existing one to avoid any gap in life insurance coverage.

Things to Check Before Surrendering Your LIC Policy

1) Check Your Eligibility: Most traditional LIC policies acquire a surrender value only after the minimum required premiums have been paid.

2) Consider a Paid-up Policy: If affordability is the only concern, converting your policy into a paid-up policy lets you stop paying premiums while retaining reduced life cover and eligible bonuses.

3) Explore a Policy Loan: If you need temporary funds, borrowing against your LIC policy may be a better option than surrendering it.

4) Review the Remaining Policy Term: If your policy is only 2-3 years away from maturity, continuing it is often more beneficial, as surrender values increase significantly as maturity approaches.

Types of Surrender Value: Guaranteed vs. Special

1. Guaranteed Surrender Value (GSV)

The Guaranteed Surrender Value (GSV) is the minimum amount LIC is required to pay once your policy acquires a surrender value. It is calculated as a percentage of the eligible premiums paid.

• For older LIC policies, the first-year premium is excluded from the GSV calculation, along with rider premiums and taxes.
• For policies issued under the current IRDAI product regulations, the GSV is calculated on the total premiums paid, excluding rider premiums and taxes.

If your policy has earned bonuses, the guaranteed surrender value of vested bonuses is calculated separately using the bonus surrender factors specified in your policy document.

2. Special Surrender Value (SSV)

The Special Surrender Value (SSV) is calculated using an actuarial formula and is often higher than the GSV, especially for policies that have accumulated bonuses over time.

The calculation is based on:

Special Surrender Value = (Paid-up Value + Vested Bonuses) × Surrender Value Factor

Where:

• Paid-Up Value = (Premiums Paid ÷ Total Premiums Payable) × Basic Sum Assured
• Vested bonuses are the bonuses earned until the date of surrender.
• Surrender value factor is determined by LIC based on the policy type, duration, and prevailing actuarial assumptions.

In most cases, LIC pays the Special Surrender Value because it is higher than the guaranteed surrender value.

Documents Required to Surrender LIC Policy

To surrender your LIC policy, you'll need to submit the following documents at your servicing LIC branch:

• LIC Form 5074 (Surrender Discharge Voucher), duly filled out and signed.
• Original policy bond.
• Valid identity proof, such as an Aadhaar card, PAN card, or passport.
• Address proof (if requested by the branch).
• Canceled cheque showing your name, account number, and IFSC code.
• Bank passbook or bank statement (if your name isn't printed on the canceled cheque).
• NEFT Mandate Form for direct credit of the surrender amount.

Step-by-Step Procedure to Surrender an LIC Policy

Offline Procedure

1. Visit your servicing LIC branch, where your policy is registered.
2. Collect or download LIC Form 5074 (Surrender Discharge Voucher) and the NEFT Mandate Form.
3. Fill out the forms and gather the required documents, including the original policy bond, ID proof, and bank details.
4. Submit the documents at the servicing branch. LIC may ask you to confirm that you understand the consequences of surrendering your policy.
5. Collect the acknowledgment receipt for future reference.
6. Once the request is approved, the surrender amount is credited to your registered bank account within 7 working days, after deducting any outstanding policy loan, if applicable.

Note: Before signing Form 5074, ask the branch for a written surrender value quotation. The amount shown on the customer portal is only an estimate and may differ from the final branch calculation due to factors such as bonus vesting dates and accrued policy loan interest. 

Form 5074 also includes a declaration confirming that you understand surrendering the policy permanently ends your life cover, may not be financially beneficial, and that you're aware of the approximate surrender value. If you have an outstanding policy loan, LIC will deduct the loan principal and accrued interest from the surrender amount before making the payment.

How to Surrender LIC Policy Online?

You cannot presently complete the full process to surrender a LIC policy online through LIC’s listed e-services. The portal provides policy, bonus, loan, claim, and revival information but does not list online surrender as one of its available functions. Use the portal to review policy information, then contact the servicing branch for the quotation, forms, and submission procedure. 

Note: If you only want to know your surrender value, you can also contact LIC's customer care on +91 22 68276827.

Tax Implications & Alternatives to Surrendering

Before surrendering your LIC policy, consider the tax implications and whether an alternative option better suits your needs.

Tax Implications

The tax treatment of your surrender value depends on the type of policy and the applicable provisions of the Income Tax Act.

• Traditional Life Insurance Policies: The surrender value is tax-exempt under Section 10(10D) if the annual premium does not exceed 10% of the sum assured (20% for policies issued before 1 April 2012).
• High-Premium Policies: For policies issued on or after 1 April 2023 with annual premiums exceeding ₹5 lakh, the surrender value may be taxable as Income from Other Sources, and TDS under Section 194DA may apply.
• Early Surrender: If you surrender the policy within 2 years of commencement, any Section 80C deduction claimed under the old tax regime is reversed.
• Unit-Linked Insurance Plan (ULIP): If surrendered before the 5-year lock-in, the proceeds become taxable, and any Section 80C deduction claimed under the old tax regime is reversed. After the lock-in, the proceeds are tax-exempt only if the policy satisfies the conditions under Section 10(10D), including the ₹2.5 lakh aggregate annual premium limit for ULIPs issued on or after 1 February 2021.
• Pension Plans: For pension plans such as LIC Jeevan Shanti, the surrender value is taxable as Income from Other Sources, and any Section 80CCC deduction claimed is reversed.

Alternatives to Surrendering

• Paid-up Conversion: Future premiums stop, while reduced cover and vested benefits continue. Future bonuses usually stop, and riders may end.
• Policy Loan: Provides liquidity without immediately terminating the policy. Eligibility, amount, and interest are plan-specific.
• Continue: Compare the remaining premiums with the maturity benefit, rather than assuming that holding is always better.

Should You Surrender Your LIC Policy or Convert It to a Paid-Up Policy?

If you can no longer afford your LIC policy premiums, you don't necessarily have to surrender the policy. Converting it into a paid-up policy allows you to stop paying future premiums while retaining a reduced life cover and any vested bonuses. Surrendering, however, permanently terminates the policy in exchange for its surrender value.

Why Choose Ditto for Life Insurance?

At Ditto, we’ve assisted over 8,00,000 customers with choosing the right insurance policy. Why customers like Vijay below love us:

• No-Spam & No Salesmen
• Rated 4.9/5 on Google Reviews by 25,000+ happy customers
• Backed by Zerodha
• Dedicated Claim Support Team
• 100% Free Consultation

You can book a FREE consultation. Slots are running out, so make sure you book a call now or chat with us on WhatsApp!

Conclusion

Surrender can provide immediate cash, but it permanently ends the policy and may lock in an early loss. Before you surrender an LIC policy, compare the surrender value with alternatives such as a paid-up policy or policy loan, remaining premiums, and the expected maturity payout. If this is your only life cover, arrange adequate replacement cover before surrendering. A surrendered policy cannot be revived. A lapsed or reduced paid-up policy may be revivable within the permitted period, subject to policy terms and underwriting.