Life insurance policies are usually purchased with the objective of long-term financial security. The largest public sector life insurer, Life Insurance Corporation of India (LIC), has been offering a wide range of insurance policies. The LIC policies are offered for a pre-determined period.

However, at times, many policyholders may need to discontinue the insurance coverage or prematurely withdraw their accrued funds due to various reasons. In such instances, surrendering the policy could be the suitable choice.

This means one voluntarily cancels the policy before maturity and receives the surrender value, if any. Surrendering an LIC policy can lead to financial losses and the termination of the insurance coverage. So, it’s important to carefully evaluate some key aspects before opting for surrendering your LIC policy.

1. Financial Pressure

If you are finding it hard to pay premiums regularly in view of unforeseen expenses, loss of employment, or other financial issues, giving up your policy could be an easy solution. But remember that closing your LIC policy early would involve a smaller payout, compared to the amount of premiums paid. In such a situation, it is preferable that you explore options like making the policy paid-up, whereby you forgo further payment of premiums but continue to enjoy lowered benefits.

2. Policy Tenure And Surrender Value

LIC policies tend to gain a surrender value only after you have paid premiums for three years or more. The surrender value tends to be much less in the initial years. Therefore, surrendering in the early years may entail losses. The longer you keep the policy, the greater the surrender value.

3. Alternative Investment Options

Certain policyholders opt to surrender an LIC policy due to better returns available in other financial products such as mutual funds, fixed deposits, or newer insurance schemes. If your current policy does not suit your financial objectives, surrendering it could be a prudent step. However, always compare the expected surrender value with the possible returns from a new investment prior to deciding.

4. Insurance Needs

Before you surrender, consider if you still require the protection that the policy offers. A conventional LIC policy will not give much return, but it does offer life cover. If you do not have sufficient insurance under some other source, surrendering could make your family economically vulnerable in the event of an unforeseen incident.

5. Tax Implications

Surrendering a policy may increase your overall tax burden as you will not be able to claim the deductions on Section 80C of the Income Tax, 1961. Always verify the tax implications before surrendering your insurance policy.

Surrendering an LIC policy is a significant financial decision and it should not be taken hastily. Assess your financial position, long-term needs and options that are available. If unsure, it would be wise to seek the guidance of a financial advisor so that you do not end up losing more than you gain.

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