Understanding the Surrender Value of an LIC Policy After 5 Years
Important Notice: Withdrawing any Insurance policy is not recommended. Surrender benefits depend on the policy terms and conditions. Kindly visit the nearest LIC branch for detailed information.
Overview of Life Insurance Policies
When it comes to life insurance, there are several types of policies to choose from, each with its own unique characteristics and benefits. Understanding these types can help you make informed decisions about your financial future.
1. Term Plans
Definition: Term plans are pure risk transfer policies where a policyholder pays a nominal premium for a substantial sum insured. These plans provide no return or savings component beyond the death benefit. If the policyholder passes away during the policy term, the nominee receives the death benefits. Should the policyholder survive the term without claims, no amount is paid, and the contract ends.
Advantages: The primary advantage of term plans is their affordability, as they are designed to cover the risk of death for a fixed term. However, they do not provide savings or return on investment.
Commission Impact: Term plans earn lower commissions for agents, hence they are less promoted by sales representatives.
2. ULIP Plans (Unit Linked Insurance Plans)
Definition: ULIP plans are market-linked investment plans that allow individuals to invest in either debt or equity funds. After deducting necessary charges, the policyholder can choose where to allocate the investment. Additionally, policy administration fees and fund management fees are payable.
Advantages: ULIPs can provide market-beating returns, especially after a 15-year holding period. Many ULIPs have historically delivered impressive returns in the past five years.
Commission Impact: LIC does not promote ULIPs due to the lower commissions associated with these products.
3. Endowment Plans and Money Back Plans
Definition: Endowment plans offer both life insurance coverage and a return of the premium paid at regular intervals throughout the policy term. Money back plans typically pay out a percentage of the sum insured at specified intervals (often 4-5 years).
Advantages: Promoted heavily by LIC agents, these plans offer a balance between risk coverage and savings. However, the returns from these plans are generally lower, with many options barely exceeding 7%.
Commission Impact: These plans offer higher first-year commissions to agents, which is a key reason for their promotion.
Case Study: Jeevan Aanad Policy
Given that you are a policyholder of an LIC policy for the past five years, it is likely that you have a Jeevan Aanad endowment plan. This policy structure typically includes a surrender value factor that determines the amount available if the policy is surrendered.
Surrender Value: At the time of surrender, the surrender value is calculated using a factor. Suppose the surrender value factor is 0.6. This means you will receive:
60,000 (Rs. 100,000 x 0.6) for the first year's premium 60,000 (Rs. 100,000 x 0.6) for the first year's premium for four additional yearsTotal Surrender Value: Rs. 144,000 (60,000 x 4 60,000)
Total Premium Paid: Rs. 300,000 (Rs. 60,000 per year for five years)
Net Loss: Rs. 156,000 (Rs. 300,000 - Rs. 144,000)
However, the exact surrender value and the factor used will vary based on the specific policy document. Always check with your nearest LIC branch for detailed information.
Conclusion
Understanding your insurance policy thoroughly is crucial. If you are considering surrendering your policy, visit the nearest LIC branch for detailed information on the surrender value and any other relevant terms.
Frequently Asked Questions
1. What are the main types of life insurance policies?
The main types of life insurance policies are term plans, ULIP plans, and endowment plans. Each type offers different coverage and investment options, and the specific terms will vary based on your policy document.
2. Why are term plans not promoted by LIC agents?
LIC agents typically do not promote term plans because they earn lower commissions compared to other policies. Term plans are designed to be affordable and focus solely on the risk coverage aspect.
3. Can ULIP plans deliver market-beating returns?
Yes, many ULIP plans have historically provided market-beating returns, especially after a 15-year holding period. However, these plans are not promoted by LIC due to lower commissions.