The Most Authentic Guide on Personal Finance and Investments


Words of Wisdom : "No matter how great the talent or efforts, some things just take time. You can't produce a baby in one month by getting nine women pregnant." ~ Warren Buffett

Surrender or Continue your Endowment / Moneyback Policy?

The fact of the matter is that Endowment and Moneyback policies offer pathetic returns.

Therefore, you MUST explore various possibilities to cut your losses. You can't just sit idle on a bad investment.

Insurance is a long-term contract running into decades, where premature closure can lead to huge losses.

Fortunately, there are solutions to change course, which may either help you to recoup your losses; or at best limit the damage.

Let's explore these options:


Case 1: Your policy is about to mature in the next few years

Well, you can't do much about it now. You have already paid many premiums and only a few are now due. So it's best to do nothing. Let the policy follow its intended course and mature as per the original term.

If you surrender the policy now, you don't have much time left to recover the losses that you will incur upon premature surrender.

So, you might as well continue and end the policy with 6-6.5% returns after a few years. This isn't much. But still, something is better than nothing.

However, there is one important thing you can do... take a pledge not to make the same mistake again. Thoroughly study the products BEFORE making any investment.  

surrender-policy-or-continue
Should I surrender my insurance policy or continue with it?

Case 2: Your policy is fresh and just a few years old

Simple. Surrender it. 

You will, of course, have to take a big loss upfront.

If the policy has not completed 3 years (or 2 years if the Premium Paying Term is less than 10 years), the entire premium paid till now is lost forever.

Where you have already paid 2/3 premiums... (depending on the policy terms) you will probably lose the entire 1st year premium and also 75-85% of the subsequent premiums.

But, it is good to take this hit now, rather than throwing away many future premiums of good money into a bad investment.

Instead, if you invest the same amount in pure-investment products such as PPF or Equity Mutual Funds (or a suitable mix of the two), you will 'almost surely' 
i.  not only recover your early losses, but also
ii. end with much higher amount, than what the policy would have given you on maturity.

Simple calculations show that, even a reasonable 9-11% p.a. returns on the future amounts, might be sufficient to make up for the loss today and give you more money on the maturity date.

In case you missed, please read You just lost Rs.4.80 lakhs!


Case 3: Your policy is in the middle years

You don't want to continue throwing good money into a bad product.

Nor can you afford to lose money on surrender, which you can't recover in the remaining period.

Solution?

You convert your policy into a Paid-up policy. 

Net result:

a) You won't have to pay any further premiums. Thus, in future, you can invest the same amount into better investments. This will give you more returns than what you would have otherwise earned, if you had continued with the same policy terms.

b) You don't lose money on the past investment. The Sum Assured on your policy would be proportionately reduced (based on the number of premiums paid, out of the total due). This, plus the accrued bonuses till date, would be paid to you... not now when you convert the policy, but as on the original maturity date. So, there won't be any loss in absolute terms. But yes, the effective returns on premiums paid till date will be very low (less than even the Savings Account rate of 4%).

A few important points:
1. Since the policy terms differ a lot, do your own calculations before you take any action.
2. If the policy is surrendered before two years are complete, you will to have reverse any tax benefit claimed in the past u/s 80C.
3. ULIPs work differently, so this discussion is not applicable to such plans.
4. Take a term insurance policy, if the reduced Sum Assured (on surrender or paid-up) is a risk to your family.

Wake up! It's time to restructure your Endowment and Moneyback insurance policies... NOW.

Concluding, I warn again... don't mix insurance with investment. You will often end up losing lots of money.

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