LIC Policy Surrender: Five Critical Aspects To Evaluate Before Cancelling

Life insurance policies are primarily purchased to ensure long-term financial security and safeguard one’s family against unforeseen events. According to experts, these policies are designed to provide both protection and savings benefits over a pre-determined term. However, circumstances may arise where a policyholder considers discontinuing coverage and opting for a surrender. Surrendering a policy allows you to voluntarily cancel it before maturity and receive the surrender value, if applicable. This decision carries financial implications, making careful evaluation essential.

Understanding the Financial Impact

Financial pressure is one of the most common reasons for policy surrender. Unexpected expenses, loss of employment, or other monetary challenges may make regular premium payments difficult. While surrendering a policy can provide immediate relief, it usually results in a lower payout than the total premiums paid. Experts suggest exploring alternatives such as making the policy paid-up, which stops premium payments while retaining a reduced benefit.

Policy Duration and Surrender Value

Life insurance policies typically acquire a surrender value only after a minimum number of premiums have been paid, usually around three years. Surrendering during the initial years may lead to significant losses, as the surrender value tends to be substantially lower than the total premiums paid. The longer the policy is maintained, the higher the potential surrender value, making tenure a critical factor to consider before cancellation.

Comparing Alternative Investment Options

Policyholders sometimes opt to surrender an insurance plan in favour of investments offering higher returns, such as mutual funds, fixed deposits, or new insurance schemes. According to financial advisors, it is important to carefully compare the expected surrender value with potential returns from alternative investments. This helps ensure that the financial benefits of switching outweigh the losses incurred by early termination.

Assessing Your Insurance Needs

Before surrendering, evaluate whether the coverage provided by your policy is still necessary. Conventional life insurance policies may offer modest returns but provide essential life cover. Experts emphasise that cancelling a policy without adequate alternative insurance can leave your family financially exposed in the event of an unforeseen incident, defeating the original purpose of life protection.

Considering Tax Implications

Surrendering a life insurance policy can have tax consequences. Policyholders may lose the benefit of deductions under Section 80C of the Income Tax Act, 1961, potentially increasing their overall tax liability. Consulting with a tax advisor is recommended to fully understand these implications before making a decision.

Seek Expert Guidance

Surrendering a life insurance policy is a significant financial choice and should not be rushed. Experts advise reviewing your long-term financial goals, exploring alternative options, and seeking professional guidance to avoid unnecessary financial losses. Proper planning ensures that you make an informed decision aligned with both your present needs and future security.

Disclaimer: This article is for information only. Readers are advised to consult a financial advisor or tax professional before making any decision related to policy surrender. According to experts, careful evaluation of financial position, insurance needs, and alternative investment options is essential to avoid unnecessary losses.