POSTED BY October 29, 2012 3:57 pm COMMENTS (7)
ONHi,
My doubt is regarding surrender vs paid up for my 2 LIC policies which I want to discontinue. I want to move to term insurance. My insurance coverage currently is not enough.
I see in many blogs and investment websites that people recommend surrendering the policy rather than making it paid up. I have made some calculations (see below) regarding surrendering vs making paid up of my 2 LIC policies. But my calculations show its better to make it paid up. I am not sure if I am missing something here.
It would be helpful if you can verify and confirm my calculations below. Your help is much appreciated.
Regards,
Shankar
1. Jeevan Rekha – 20 yrs
I took a 20 yr Jeevan Rekha policy with sum assured 5 lacs in Sep 2003. I have paid half yearly premium of Rs.10,822 till Mar 2012. Hence total premiums paid till date is Rs.1,94,796/-. Bonus accrued till date is Rs. 1,54,500/-.
My surrender value as on date is Rs. 98,500/-.
If I take the surrender value of Rs.98,500/- today and invest somewhere with 10% compound interest p.a., I will get Rs.2,81,032/- in 2023.
If I make the policy paid up now, in 2023 I expect to get prorated sum assured + bonus accrued till now = (9/20) * 500000 + 154500 = Rs.3,79,500/-
Hence, I think making the policy paid up is better. Can you confirm if I am correct?
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2. Jeevan Anand – 25 yrs
Similarly I took a 25 yr Jeevan Anand policy with sum assured 9 lacs in Sep 2003. I have paid half yearly premium of Rs.18,772 till Mar 2012. Hence total premiums paid till date is Rs.3,37,896/-. Bonus accrued till date is Rs. 3,38,400/-.
My surrender value as on date is Rs. 2,34,700/-.
If I take the surrender value of Rs.2,34,700/- today and invest somewhere with 10% compound interest p.a., I will get Rs.6,69,626/- in 2023.
If I make the policy paid up, in 2023 I expect to get prorated sum assured + bonus accrued till now = (9/25) * 900000 + 338400 = Rs.6,62,400/-
Again, I think making the policy paid up is better. Can you confirm if I am correct?
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HOW DID U CALCULATE SURRENDER VALUE?
What should you do if you have already bought an insurance policy. Should just let the policy lapse or surrender it or make it paid up or take a loan against the policy. How should you decide which policies should be in your portfolio and the ones that you should get rid off at the earliest. Decision depends on various factors such as:
How much cover does it offer?
If the policy is surrendered today, what will be the surrender value?
How many premiums are paid and how many remain?
Can you afford the premium?
What is the expected rate of return from your existing policy?
Can you claim tax benefit on the policy? Will your benefits on maturity be taxed?
Does policy offer a ‘paid-up’ feature?
Does your existing policy offer a loan?
Should your surrender or make policy paid up?
How much is the revival period in case you skip premium payment?
What is your alternative investment plan? i.e. if you are not paying premiums, where will you be investing the saved premium amount? What kind of returns will it give? What are the ratings of new investment and, hence, risks associated with it? Are those assured returns or expected returns?
If you give up on your existing insurance policy, you will need some insurance to cover your risk. What would that be?
our article Insurance : Surrender or Make policy paid up or Continue discusses it in detail!
Dear Shankaranand, if your sum assured is reduced from original 5L to a lower one in case of paid up, how can your bonus ‘ll remain same as per ol;d sum assured?
Thanks
Ashal
Oops. Looks like I made a mistake in calculating the returns of my 2nd policy (Jeevan Anand).
Since it is a 25 year policy, I will get the returns only in 2028.
Hence if I make it paid up, I will get Rs.6,62,400/- in 2028.
If I surrender the policy and get Rs.2,34,700 now and invest somewhere with 10% compound interest, I will get Rs.10,78,400/- in 2028.
So, for my 2nd policy surrendering it now seems to be better.
If you are taking a conservative view of investment like FD, Debt Fund, PPF, etc.l then its fine to make it paidup.
But suppose you surrender this and invest it in MF which gives retun 15-25% then its better to surrender it and invest in MF.
Actually with the amount recovered, I plan to repay a part of my home loan which I am currently paying 11% interest.
Thats even better as i have also done that.