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Should You Take Money Out of LIC?

Published in Life Insurance Management 4 mins read

No, generally, taking money out of a Life Insurance Corporation (LIC) policy by surrendering it is not advisable due to the significant financial loss incurred. While it might seem like a way to access funds, the cost often far outweighs the benefit, making it a "prohibitively costly" decision in most scenarios.

Understanding the Cost of Surrendering Your LIC Policy

When you surrender your LIC policy, you essentially terminate the contract before its maturity period. This action has several critical implications:

  • Loss of Death Benefit: The primary purpose of a life insurance policy is to provide a financial safety net to your dependents upon your demise. If you surrender the policy, the death benefit associated with it ceases immediately.
  • Minimal Surrender Value: You receive only a fraction of the premiums you've paid. This "surrender value" is often very low, especially in the initial years of the policy. For instance, the surrender value can be as low as 30% of the premiums paid in the 4th year for many LIC policies. This means you lose a substantial portion of the money you've already invested.
  • Cessation of Future Benefits: Any future maturity benefits, loyalty additions, or bonuses that the policy might have accrued will also be forfeited.

Alternatives to Surrendering Your LIC Policy

Given the severe financial repercussions of surrendering, it's crucial to explore other options if you are struggling to pay premiums or need liquidity.

1. Making Your Policy "Paid-Up"

One of the most sensible alternatives to surrendering is to convert your LIC policy into a "paid-up" policy. This option makes sense for two key reasons:

  • Avoid Heavy Losses: You stop paying future premiums, preventing further financial outflow, while avoiding the significant loss associated with a full surrender.
  • Retain Reduced Benefits: The policy continues to be in force, but for a reduced sum assured. The death benefit and maturity benefit (if applicable) will be proportionately reduced based on the premiums already paid. This way, you still retain some coverage and a potential payout without incurring further premium obligations.

How it works: After a certain number of premiums (usually 2-3 years, depending on the policy terms), you can apply to make your policy paid-up. No further premiums are required, and the policy continues with a reduced sum assured until maturity or death.

2. Taking a Loan Against Your Policy

Many traditional LIC policies allow policyholders to take a loan against the surrender value of their policy. This can be a viable option if you need short-term liquidity:

  • Policy Remains Active: The policy continues to be in force, and all benefits (death and maturity) remain intact.
  • Competitive Interest Rates: Loans against insurance policies often come with relatively lower interest rates compared to personal loans.
  • Flexible Repayment: You can often repay the loan amount at your convenience, though interest continues to accrue.

3. Assigning Your Policy

In some cases, you might be able to assign your policy to a third party (e.g., a bank) as collateral for a loan. This is less common for individual liquidity needs but can be an option if you need to secure a significant loan.

When Might Surrendering Be Considered (with Caution)?

While generally discouraged, there might be extremely rare circumstances where surrendering is considered, but always as a last resort:

  • Dire Financial Emergency: If you have absolutely no other source of funds and face an extreme financial crisis, surrendering might provide some immediate, albeit costly, liquidity.
  • Extremely Poor Performing Policy: If the policy's returns are abysmal and you have a clear, significantly better investment alternative available that can quickly offset the surrender loss, and you have exhausted all other options. However, this requires careful financial planning and expert advice.

Surrender vs. Paid-Up: A Comparison

To better understand the implications, here's a quick comparison between surrendering your policy and making it paid-up:

Feature Surrendering Policy Making Policy Paid-Up
Premium Payment Stops immediately Stops immediately
Death Benefit Ceases entirely Continues with a reduced sum assured
Maturity Benefit Forfeited Continues with a reduced sum assured
Financial Impact Receive only a small surrender value (e.g., as low as 30% of premiums in early years); significant financial loss Avoids heavy surrender loss; benefits are proportionate to premiums paid
Policy Status Terminated Active with reduced benefits

Conclusion

In most situations, taking money out of an LIC policy by surrendering it is financially detrimental. The immediate access to funds comes at the high cost of losing a significant portion of your invested premiums and forfeiting crucial insurance coverage. Instead, exploring options like making your policy "paid-up" or taking a loan against it offers more prudent ways to manage your policy or meet liquidity needs while preserving some of your investment and insurance benefits. Always consult a financial advisor before making such a significant financial decision.