I understand, insurance as an investment is a bad idea. The only product that one should buy from an insurance company is Term Insurance. All other forms of insurance product is nothing but wastage of money.
There are different types of insurance products which are available for consumers in the market such as endowment policies, money back polices and ULIPs. All these products are only beneficial for the agents who are selling these to the customers. Agents earn huge amount of commission on these products that are currently available in the market. For e.g. In an Endowment and Money back policy, the commission that an agent earns would be in the range of 20-30% , whereas for ULIPs, commissions are in the range of 5%-7%.
The important thing to note here is that these charges are deducted from your premium amount and are paid to agents as commission.
Anyways, I have decided that I will not purchase any insurance product in future and I have already bought a term insurance. However, the challenge that I had to deal with was regarding my existing insurance policies? Should I continue or surrender my existing insurance policies, be it LIC Jeevan Anand or any other LIC endowment policy?
Now, this is a big decision. It is very difficult to accept that I will lose my hard-earned money if I surrender my LIC Jeevan Anand policy.
But is it always advisable to surrender the policy? The answer is a big “NO”.
The decision to surrender the policy should be purely based on calculations and not on notional mindset that insurance policies are bad.
Also Read : How much term insurance should you buy in India?
Let us discuss some scenarios here to understand, whether to continue or surrender one’s LIC policy.
Let’s take the example of Jeevan Anand Policy from LIC.
Should I surrender my Jeevan Anand Policy from LIC?
Should I surrender my Jeevan Anand Policy if I have paid the premium for 3 years
- Policy Commencement Date: Jan 2016
- Sum Insured – Rs. 7 Lakhs
- Policy Term – 20 years
- Premium Paying Term – 20 years
- Yearly Premium – Rs. 41,206/-
- Date of Maturity – Jan 2036
Surrender After 3 Years
- Premium paid in 3 Years – Rs. 123,618
- Surrender value after 3 years – Approx. 30% of premiums paid -Rs. 37000
- Vested Bonus after 3 Years – Approx. Rs. 15,000
Assuming the surrender value after 3 years would be approx. Rs. 52,000. Now, should you surrender this policy and take a loss of Rs. 71,618?
If you invest this surrender amount and invest the future premium in mutual funds, what will be the projected earnings? Also, if you continue the policy, what would be the maturity value?
|Surrender and Invest in Mutual Funds for next 17 years||Continue the Policy|
|Lump Sum -52,000||Lump Sum-0|
|Yearly Investment – 41,206||Yearly Investment – 41,206|
|Assumed CAGR -12%||Assumed Bonus – Rs. 45 per thousand and One-time Terminal Bonus of Rs. 35 per thousand|
|Value in 2036 – 23.7 Lakhs||Value in 2036 – Rs. 13.5 Lakhs|
You will earn a surplus of 10.2 Lakhs after 17 years. Would you surrender?
I am presuming that most of you would definitely say a Yes. In this case, even my answer would be positive. I would suggest that you should go ahead and surrender your policy.
But your agent may lure you to pay one more premium by showing you the surrender factor of next year.
How is surrender value of LIC calculated?
Surrender value of LIC policy is calculated by multiplying the number of premiums paid and surrender value factor attached to it.
It is mostly available in endowment insurance policies. Surrender factor in Jeevan Anand is 0.3 after 3 years and 0.5 after paying 4 premiums.
This means that your surrender value would be 30% of the total premium paid if you surrender the policy after 3 years. But, it would be 50% of the total premium paid if you surrender the policy after 4 years. Do not get confused and fall prey and continue investing in the hope of earning some returns. Surrender the policy right away.
The losses incurred would be still the same. Final Value will be the same as shown in the above table.
It does not make any difference, whether you surrender your policy after the 3rd year or 4th year.
Surrender After 10 Years
- Premium paid in 10 Years – Rs. 4,12,060
- Surrender value after 10 years – Approx. 57.5% of premiums paid -Rs. 2.37 Lakhs
- Vested Bonus after 10 Years – Approx. Rs. 60,000
Assuming the surrender value after 10 years would be approx. Rs. 2.97 Lakhs. Now, should you surrender this policy and take a loss of Rs. 1.15 Lakhs?
If you invest this surrender amount and future premium in mutual funds, what will be your potential earnings? Also, if you continue the policy, what would be the maturity value?
|Surrender and Invest in Mutual Funds for next 10 years||Continue the Policy|
|Lump Sum -2.97 Lakhs||Lump Sum-0|
|Yearly Investment – 41,206||Yearly Investment – 41,206|
|Assumed CAGR -10%
(Since the time frame to invest is less here)
|Assumed Bonus – Rs. 45 per thousand and One-time Terminal Bonus of Rs. 35 per thousand|
|Value in 2036 – 14.2 Lakhs||Value in 2036 – Rs. 13.5 Lakhs|
You will earn a surplus of 70,000 after 10 years. Would you surrender?
In scenarios like these, it gets complicated. There is no surety of earning 10% returns in mutual funds, At the same time, there is no surety of earning the same bonus in LIC policies for next 10 years. In my opinion, the policy should not be surrendered here. Take this policy as a part of your debt portfolio and continue.
What Happens after 15 years?
After 15 years, if you invest the surrender value and future premium in mutual funds, you will get around 11.6 Lakhs assuming a CAGR of 10% (though I should not assume CAGR of 10% for 5 years)
In this scenario, you will earn a surplus of 1.9 Lakhs if you remain invested in Endowment policy.
So, the obvious choice is to continue.
Should I pay my 2nd Year and 3rd year Premium?
Let us understand this with the help of a Table:
Premium Amount: Rs. 41206
|Paid For||Surrender Value||Loss|
|1st Year||0||Rs. 41,206|
|2nd Year||0||Rs. 82,412 (41206 * 2)|
|3rd Year||Rs. 52,000||Rs. 71,618 ((41206 * 3)- 52,000)|
So, if you have paid for 2 years premium, you can pay the third premium and then surrender. But if you have paid only one premium, do not pay the 2nd premium. This is just an example of Jeevan Anand Policy. The conditions in other endowment policies can be different. So, ensure to check the policy conditions before paying the 3rd premium.
Note- These calculations work best if the term of the policy invested is less than 25 years. Policies having term of more than 25 years have one-time terminal bonus of approx. Rs. 450 per thousand sum assured, which definitely makes a difference in final maturity value of your policy.
Surrender or Continue Calculator
You can download and fill in the details in an excel sheet and you will be in a better position to decide on
Should I surrender my Jeevan Anand Policy?
Conclusion – Should I surrender my LIC Policy?
Are you already asking yourself – Should I surrender my Jeevan Anand Policy from LIC? If yes, then take a wise calculative decision and not a random one. Insurance policies are usually very complex bundled products. Any decision that involves surrender of insurance policies because you have gained some knowledge of mutual funds is never a wise one. Take your own decision, after all money is yours. We can only help you to facilitate and reach towards a wise decision.