Can LIC policy be closed midway?
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We all buy life insurance for a secure future for ourselves and our families. But many times such financial situations arise in life, when bearing the burden of premium becomes heavy. In such a situation, it is very natural to think of closing the policy midway or surrendering it. If you are also planning to close your LIC policy before maturity, then wait. Surrendering the policy not only ends your protection, but can also result in loss of a large portion of your savings. It is very important to understand this entire process and its advantages and disadvantages.
What is policy surrender?
In the world of insurance, when you close the policy before the completion of its stipulated term and ask for your money back from the insurance company, this process is called ‘Policy Surrender’. Generally people feel that they will get back the amount they have paid as premium. But the reality is different from this. The amount that the company returns to you is called ‘surrender value’. This amount may be much less than the total premium paid by you. Surrender charges and other deductions are mentioned in the policy documents, which people often ignore. The result is that the money deposited to help in bad times is returned less than expected.
Not just money, security cover also comes to an end
The biggest and most serious loss of surrendering the policy is not financial but in terms of security. As soon as you surrender the policy, your life insurance coverage stops with immediate effect. This simply means that if any untoward incident happens to the policyholder in future, his family or nominee will not receive any death benefit (death claim amount). The purpose for which you had taken this policy years ago remains unfulfilled. In the case of term insurance, the situation is even different. There is no saving component in a term plan, so if you leave it midway, there is no coverage left and no money back.
Why is a large part of your deposit deducted?
Policyholders often ask the question why they do not get their full money back? The mathematics of insurance works behind this. In the initial years of the policy, a large part of the premium you pay goes towards agent commission, administrative expenses of issuing the policy and underwriting charges. This is the reason that if a person closes the policy within the first 2 to 4 years of its inception, he has to suffer huge losses. Benefits like bonuses and loyalty additions available in endowment or money-back policies also become void as soon as the policy is surrendered. That means, the benefit that you could have got by maintaining the investment for a long time gets lost in an instant.
What is the better option instead of closing the policy?
If you are struggling with financial crunch and paying the premium is difficult, then closing the policy is not the only solution. You can get your policy ‘Paid-Up’. This is a kind of middle path. In this you stop paying further premium, but the policy does not stop. It continues till maturity with lower sum assured. Although the benefits get reduced, your coverage does not end completely. Additionally, insurance regulator IRDAI has recently made some changes in the rules, due to which policyholders may get slightly better surrender values than before in certain circumstances. Therefore, before taking the final decision, definitely ask for the calculation of both ‘surrender value’ and ‘paid-up value’ from your insurance company.