A reader writes, “I am 29 years old and had started a few LIC policies on my parent’s insistence six years ago. I pay an approximate total of 3000 a month for 25 yrs, or so the policy insured sum is 1 lac for seven policies, and the return the life insurance agent said I’d get is around 2.5 lac. I have paid around 2.5 lacs total to date.”
“I don’t feel the returns are worth it. Would it make sense to cancel the policy and invest the money I receive, which would be half the invested money, elsewhere? Could you write an article describing If it makes sense to continue or if bailing out with a loss is the better option?”
There are two aspects to the problem:
- Logical – determining what to do with the policies and ensuring other steps of financial planning and protection are in place
- Emotional – how to deal with loss.
Those interested in computing which option is better can consult this tool: Insurance Policy Surrender Value & Paid-up Value Calculator. We offer some simple thumb rules for handling loss and financial planning in the following.
Step 1: Get yourself a big fat term insurance policy first. When applying, you must mention the existing life insurance policies (in force). This typically will not reduce the cover the term insurer will offer.
Step 2: Getting rid of something is easy, but where else will you invest? Mutual funds? You are wondering about the loss or low returns from these policies. Are you aware that you will face much bigger losses (or gains) daily from mutual funds? Are you aware there is no guarantee of returns from capital market-linked products?
Are you aware of how much you need to invest for your long-term goals and in what asset allocation? Do you have a strategy (other than hope) to combat market risk?
We recommend removing these policies only after a proper financial plan with adequate life cover is in place. Here are some resources to help you get started:
Step 3: You have realised that the product is unsuitable. So there is no point in paying any more premiums. There are three options.
-
- You can either stop paying premiums but continue a (limited) relationship with the insurer by making the policy “paid-up”
- Or you can sever all ties and surrender the policy.
- Or you can continue the policy.
Option 3 is recommended only if 25-30% of the premium-paying duration is left. If you have paid about half the premiums, you make the policy “paid-up”. You will get “something” when it matures. For policies younger than this, surrendering is the cleanest option. Of course, surrendering will work for all cases, but many cannot handle the prospect of “loss”.
We recommend that the reader and other investors in the same boat not dwell too much on what to do with such insurance policies. What matters more is (a) having adequate life insurance coverage and (b) a proper goal-based financial plan. Once this is in place, premiums for such policies can be stopped, and they can either be paid up or surrendered as per the emotional comfort level of the individual. There is no one size fits all solution in personal finance.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
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