Can You Withdraw The Bonus from Your LIC Policy?

Life Insurance Corporation (LIC) of India is the country’s largest life insurer. Most Indians invest in LIC policies as they offer guaranteed returns along with life cover. One of the key benefits of LIC policies is the bonuses they accrue over time. But can policyholders withdraw these bonuses anytime they want? Let’s find out.

What are LIC Bonuses?

LIC policies accrue two types of bonuses:

• Reversionary Bonus: This is an annual bonus declared at the end of each financial year based on LIC’s profits. It ranges from 5-7% of the sum assured and accrues every year. It is payable only on maturity or death of the policyholder.

• Terminal Bonus: Also known as Loyalty Addition, this bonus is payable only on maturity. LIC declares terminal bonuses more randomly based on profits. They are generally higher than reversionary bonuses.

These bonuses significantly increase the maturity value of the policy. The longer you hold the policy, the more bonuses you can accrue.

Can You Withdraw LIC Policy Bonuses?

LIC bonuses form a part of the guaranteed maturity benefit of the policy. You cannot withdraw them separately anytime during the policy term.

However, there are two ways you can get the accrued bonuses in cash:

1. Surrender the LIC Policy

You can surrender your LIC policy anytime after paying premiums for at least 3 years. On surrender, the insurer will pay you:

• Guaranteed Surrender Value (GSV)
• Special Surrender Value (SSV)

GSV includes a percentage of all the premiums you’ve paid along with the reversionary bonuses accrued till date. SSV may be higher than GSV and includes terminal bonuses too.

So if you surrender a LIC policy, you can withdraw the accrued bonuses as cash.

However, surrendering before maturity involves:

• Losing out on future bonuses
• Getting only a percentage of your premiums back
• Loss of insurance cover

So it may not be the wisest thing to do.

2. Take a Loan Against the LIC Policy

Another way to withdraw LIC bonuses before maturity is by taking a loan against your policy.

After 3 years of paying premiums, you become eligible for policy loans up to 90% of the surrender value. This loan amount will include the bonuses accrued till date.

The benefits of taking a policy loan rather than surrendering are:

• The policy continues, bonuses continue to accrue
• You retain the life cover
• You can repay the loan anytime and have the policy reinstated

The only drawback is you need to servive the interest on the loan.

Which is Better – Surrendering or Keeping the LIC Policy?

If you have paid premiums on your LIC policy for at least 3-5 years, you have two options:

• Surrender the policy and withdraw the accrued amount
• Convert to a Paid-up policy and continue till maturity

Here is a comparison of the two options:

If you surrender the LIC policy, you lose out significantly on the power of compounding. The policy would have earned significantly higher returns by continuing till maturity.

However, if you face a financial emergency and need cash urgently, surrendering may be an option.

But if you don’t need immediate funds, continuing the policy as paid-up is the better option. You will keep earning bonuses and get a higher maturity value.

Here is a summary of the pros and cons:

Surrendering LIC Policy

Pros

• Receive cash immediately to meet financial goal or emergency
• No need to continue paying premiums

Cons

• Lower returns compared to maturity value
• Loss of insurance cover
• Loss of future bonuses

Keeping LIC Policy Paid-up

Pros

• Policy continues to earn bonuses
• Get full maturity value
• Insurance cover continues

Cons

• No immediate access to cash
• Lower bonuses compared to premium paying policy

So unless you urgently need a large sum of cash, it is better to stay invested in your LIC policy till maturity. This allows you to gain from the power of compounding and get the maximum benefit.

Bonus Rates on Popular LIC Policies

Here are the approximate bonus rates offered on some popular LIC policy plans:

So based on the size of your sum assured and the policy tenure, these bonuses can add up to a substantial amount over time.

Conclusion

• LIC policies can earn significant returns through bonuses that accrue every year
• You cannot withdraw LIC bonuses directly during the policy term
• To get accrued bonuses in cash, you can surrender your policy after 3 years or take a policy loan
• It is better to hold the LIC policy till maturity to gain from the power of compounding
• Surrendering the policy results in loss of insurance cover and future earnings
• If you don’t need immediate cash, keeping the policy as paid-up is a better option

So be very careful before surrendering your LIC policy mid-way. Do a thorough cost-benefit analysis to make the right decision. Continuing the policy as paid-up allows you to take advantage of the bonuses to the fullest and get higher maturity proceeds.