Three years ago, I had taken a traditional endowment policy from LIC. I have already paid 3 years premium and the next one is due in the upcoming month. Recently, I heard that endowment policies are not good for investments. The returns in the policies are only around 5-5.5% and in some cases returns go up to 6%. With these kinds of returns, I do not want to continue the policy- Should I surrender my LIC policy?
The situation is similar with 2 other endowment policies which I had purchased from different insurance companies. The policy terms are 15 years and 20 years respectively. Now I want to know whether to continue or surrender all these policies.
Are you facing the similar situation for your insurance policies? Do you also want to know the logic behind surrendering the insurance policy? Then read on.
First of all, let us become familiar with the surrender value of traditional endowment insurance policies. We are not going to talk about ULIPs here as it is an altogether different ball game.
What Is Surrender Value – Meaning?
Surrender value refers to the cash value that a person receives upon terminating the policy before maturity. Though the policy can be surrendered once the first premium is paid, it doesn’t acquire cash value in the 1st year. Most of the policies in the market acquire the cash surrender value only after payment of the 3rd premium. However, there’re some policies which acquire the same after the 2nd premium payment in case the policy tenure is less. It is also called Guaranteed Surrender Value.
Special Surrender Value
Special surrender value is normally higher than guaranteed surrender value as some part of bonus amount is added in the surrender value.
Insurance companies say that the higher of surrender value or guaranteed surrender value is paid after payment of 2/3 years premium. As per IRDAI regulations, at least 30% of the premium must be returned after the payment of 2/3 premiums. But this is applicable only if the policy is surrendered after 2 or 3 years.
Should I Surrender My LIC Policy?
Taking a surrender decision is not an easy task as you surely lose some amount of money in the process. The earlier you surrender, more the losses.
But sometimes it’s necessary to bear the losses. It’s so because investments in other instruments can give better returns and make up for losses at the same time.
Also Read: Should I Surrender My Jeevan Anand Policy?
Let us try to understand this statement with an example.
Ajay has an endowment policy for which he pays a premium of 1 Lakh per annum. The policy has a 10-year premium payment term (The term for which Ajay needs to pay the premium). The policy term is 10 years i.e. Ajay will receive the maturity value after 10 years.
He has paid premiums for 3 years whereas 7 premiums are yet to be paid. Should he surrender or continue with the policy?
Let us see!
The amount, he will receive if he surrenders the policy – 3,00,000*0.40 =1.2 Lakhs (approximate value). I’m sure that insurance companies aren’t even going to give that much.
(0.40 has been considered as special surrender factor and 3,00,000 is the premium paid amount)
The loss is somewhere around 1.8 Lakhs.
Now, let us determine the maturity value of the policy in case Ajay decided to continue with it. Assuming a 6% CAGR, the amount at the time of maturity would be around 13.2 Lakhs.
Since Ajay is convinced that mutual funds offer better returns, he surrenders the policy. After receiving the surrender amount of 1.2 Lakhs, he invests the same in equity mutual funds. Also, he decides to invest the 7 future premiums (which weren’t paid in the endowment policy) in equity mutual funds.
Do you have any idea how much returns are required to get 13.2 Lakhs? (Which he was supposed to receive at the maturity of policy i.e.13.2 Lakhs).
13% CAGR in the next 7 years. It’s more of a risky investment rather than a traditional policy. It would be extremely difficult to get these returns in such a short span of time.
So, it is better not to surrender the policy.
What If The Policy Term And Premium Payment Term Is 15 Years?
Considering the same case mentioned above, Ajay would receive a maturity value of 23.3 Lakhs assuming returns of 6% if the policy term is 15 years.
What if he surrenders and takes a loss of 1.8 Lakhs? What if he invests the surrender value and future premium in mutual funds?
Assuming 10% returns, he would get around 25.2 Lakhs after 12 years if he surrenders the policy now. My assumption of 10% returns is quite nominal as time to invest is more.
Besides covering his losses, he would have an additional amount of around 1.9 Lakhs.
It indeed makes plenty of sense here to surrender the policy.
Same goes for the 20-year term which would be even better. Here, the difference of additional amount would be around 10 Lakhs.
When To Surrender And When To Continue -Conclusion
- Surrender is recommended only if you’d be able to compensate for losses in the long-term, by surrendering the policy. I have already given one example above. Here is the 2nd one – If your policy term is 15 years and you’ve already paid 10 years premium, you should never surrender because you would never be able to cover the losses in 5 years.
- Is it impacting your goals? Could you be better off by surrendering the policy? Let us say, I need a monthly investment of 50,000 for achieving my goals. I am already making the required investments in proper instruments. Yes, I had taken one endowment policy when I wasn’t aware of the insurance returns. But an additional amount of 5,000 going to the insurance premium is not impacting my goals at all. Moreover, I will consider it as a debt instrument. Anyways, I’m assuming that debt instruments are going to provide me with 6% returns. This will give me 5.5%, why to lose your sleep over that?
- And the most important point. One mistake has already been made by taking an insurance policy as investment instruments. The mistake was committed only because of the misleading returns which were falsely being showed as 9-10%. Ensure that you don’t commit the 2nd mistake by just assuming that it’s always better to surrender the policy. It is easy to lose money but to get it back is a difficult task.
Insurance products are highly complex and difficult to understand. Take your time to figure out whether the product would be good for you or not. Lastly, take an informed calculative decision instead of a random one.
Rest everything depends on what you want, after all, it is your hard-earned money.
How to Surrender LIC Policy Online?
You can not surrender your LIC policy online. You can either do it by
- Visiting the branch or
- By sending the surrender form, policy document by courier to the concerned branch.
Also, the policy can only be surrendered in the same branch from where it has been purchased.