Surrendering LIC Policy To Invest In Mutual Funds? Here’s How To Decide

Life insurance policies issued by the Life Insurance Corporation of India (LIC) have traditionally remained reliable options for investors due to their dual benefit of protection and assured returns. Returns are assured in traditional plans, like endowment or money‑back policies, along with tax benefits under Section 80C of the Income Tax Act, 1961.

Generally, maturity proceeds are exempt under Section 10(10D), making them very attractive as an investment avenue for risk-averse investors.

However, the returns are mostly lower compared to other instruments like mutual funds. Investors also face a substantial loss when an LIC policy is surrendered prematurely.

As the mutual funds are emerging as preferred investment options for investors looking for market-linked returns, many could be considering surrendering an LIC policy and investing the money in mutual funds.

Here are a few crucial factors to know before surrendering an LIC policy and diverting the amount to other avenues like mutual funds.

A surrender value is offered when you terminate an LIC policy before its maturity. The value represents a lump sum based on the total premiums paid, after the deduction of applicable charges.

Most of the LIC policies usually qualify for surrender only after about three full years of premium payments.  

On the other hand, mutual funds are market-linked investment products managed by professionals. They also provide the potential for higher returns over the long term with greater liquidity and flexibility. You can redeem units at any time, though some funds come with an exit load.

This is in contrast to the low returns from LIC and its extended lock-in period. This could be an important factor for many investors to consider a switch.

However, mutual fund returns are prone to market risks. Their returns rise and fall with the market trends. Returns are also not guaranteed.

Then gains from mutual funds are liable for capital gains tax, while in the case of LIC policies, maturity proceeds are usually tax-free, subject to certain conditions.

One clear point is that insurance coverage and investment should ideally be kept separate. Term insurance plans could be affordable options for protection. On the other hand, mutual funds are more suitable for long-term wealth creation.

If your current LIC policy is more of an investment or savings vehicle, rather than a genuine insurance need, it might make sense to explore other instruments that offer comparatively higher returns.

To decide, you should compare expected future returns on your LIC policy with potential mutual fund returns. Consider the cost of surrendering an LIC policy, review your risk tolerance, investment horizon and ensure you retain adequate life cover.

A financial planner’s guidance could help quantify trade-offs based on your goals.

To conclude, surrendering your LIC policy to invest in mutual funds can make sense if your goals aren’t aligned with the insurance plan’s structure, you have sufficient life cover and you’re comfortable with market risk for potentially higher returns.

It’s advisable to review how each option fits your long-term financial plan before making the final decision.