When you surrender your LIC policy, whether you receive a bonus depends on the specific terms and conditions of your policy. While accumulated bonuses may be considered, surrendering an insurance policy is generally viewed as breaking a contract, meaning the policyholder will typically receive only a limited portion of the money paid as premiums.
Understanding Bonus Payouts on Policy Surrender
Life insurance policies, especially traditional participating plans, often accrue bonuses over time. However, the payout of these accumulated bonuses upon surrender is not guaranteed or straightforward:
- Policy Terms and Conditions: The most crucial factor determining if an accumulated bonus will be given is the specific terms and conditions outlined in your LIC policy document. These terms dictate how surrender value is calculated and what portion of accrued bonuses, if any, is paid out.
- Surrender as Contract Breach: Surrendering a policy before its maturity date is essentially breaking the insurance contract. Due to this, the insurer is not obligated to return the full amount paid in premiums or the entire accumulated bonus. Instead, a 'surrender value' is calculated.
- Limited Payout: The money you receive upon surrendering, known as the surrender value, will be a limited portion of the premiums you've paid. This surrender value may include a reduced portion of any accumulated bonuses, as per the policy's rules, rather than the full bonus amount. It's important to understand that the payout will always be less than the total premiums paid and significantly lower than the policy's maturity benefit.
Factors Affecting Your Policy's Surrender Value
The actual amount you receive when surrendering your LIC policy, including any potential bonus component, is influenced by several factors:
- Policy Duration: Generally, a policy needs to complete a minimum period (often 2-3 years) with all premiums paid for it to acquire any surrender value. The longer the policy has been in force, the higher its surrender value might be, although it rarely matches the premiums paid.
- Type of Policy: Different types of LIC policies (e.g., endowment, money-back, whole life) have varying surrender value clauses. Unit-linked insurance plans (ULIPs) might have different surrender charges and calculation methods compared to traditional plans.
- Premium Payment Frequency and Amount: Consistent and higher premium payments contribute to a larger premium base from which the limited portion is calculated.
- Accumulated Bonuses and Guaranteed Additions: If your policy has accumulated bonuses or guaranteed additions, a portion of these might be included in the surrender value calculation, but often at a reduced rate.
For more detailed information regarding the process and implications of surrendering an LIC policy, you can refer to resources on financial planning related to life insurance surrender.
Why Surrendering Your Policy is Often Not Advisable
Surrendering an LIC policy is typically a last resort, as it almost always results in a financial loss:
- Significant Financial Loss: You will receive considerably less than the total premiums you have paid. The difference represents the cost of insurance cover provided, administrative charges, and the loss incurred by breaking the long-term contract.
- Loss of Insurance Coverage: Upon surrender, your life cover ceases immediately, leaving you and your dependents without financial protection.
- Loss of Future Benefits: You forfeit any potential future bonuses, loyalty additions, or the full maturity benefit that the policy would have provided if continued until its term.
Before considering surrendering your policy, it's advisable to explore alternatives such as:
- Making the Policy Paid-Up: If you stop paying premiums after a certain period, your policy might convert into a "paid-up" policy. This means the life cover continues for a reduced sum assured, and you won't need to pay further premiums, thus avoiding a complete loss.
- Policy Loan: Many LIC policies allow you to take a loan against the surrender value of your policy. This can provide liquidity without terminating your insurance coverage.
- Revival: If your policy has lapsed, you might have the option to revive it by paying the pending premiums with interest.
In conclusion, while an accumulated bonus might be factored into the surrender value of your LIC policy depending on its terms, you will only receive a limited portion of your premiums back, making surrender a less favorable financial decision.