Old LIC Policies, surrender or continue?

POSTED BY Ashesh Bharadwaj ON May 23, 2012 11:00 am COMMENTS (5)

I know this topic has been beaten to death but for me it is important to know that for the second time I am not making a mistake 😉

I am in the process of putting my finances back in shape.

My first and foremost worry right now is regarding the 22 LIC policies which I bought in 2004. The premium is due on 28th May so I have to decide quickly about it.

They will start maturing in 2031 till 2051. The combined yearly premium for them is 40K. So far I have paid around 2.8 lacs (7 years). The surrender value right now comes out to be 1.3 lacs.

Below are the two calculations (out of 22 policies) I have made based on whatever I read on internet.

***Policy: 1***

The Endowment Assurance Policy (T.No. 14)
Start Date: May 2004
Term: 27 years
SA: 75,000
Premium: 2657
Interim Bonus = 48
FAB = 540
Total Bonus = 75 x 48 x 27 = 97200
Total FAB = 75 x 540 = 40500
Total = 75000 + 141750 + 40500 = Rs 212700
IRR = 7%

If I invest Rs 2657/pa at 10% rate of interest for 27 years then the return will be Rs 353938

***Policy: 2***

The Endowment Assurance Policy (T.No. 14)
Start Date: May 2004
Term: 47 years
SA: 60,000
Premium: 1380
Interim Bonus = 48
FAB = 3000
Total Bonus = 60 x 48 x 47 = 135360
Total FAB = 60 x 3000 = 180000
Total = 60000 + 77760 + 180000 = Rs 375360
IRR = 6.2%

If I invest Rs 1380/pa at 10% rate of interest for 47 years then the return will be Rs 13,00,000

My questions are:

1. Shall I surrender these policies? I will be bearing a loss of around 1.5 lacs.
2. If I surrender these policies and start investing the 40K in MF then how much time would it take to recover the 1.5 lacs loss and start earning profit to exceed the returns from the LIC policies?

I was able to calculate
Current Principal: 1.3 lacs
Annual Addition: 40K
Years: 19
Interest: 10%
Final Value 30 lacs but I am not able to compare it with policy returns.

3. Assuming that the calculations above are accurate, I see that Interim Bonus and FAB play an important role so how much fair it is to calculate the final return on the basis of the last year rates declared by LIC? Maybe 5-10 years down the lane they give much better Interim Bonus and FAB. Am I missing something?

Sorry if any of the above does not make sense.

5 replies on this article “Old LIC Policies, surrender or continue?”

  1. shantanu001 says:

    Even i have taken “Endowment Assurance Policy (T No 14)” policy from LIC in 2001, with Policy term 40 yrs, Sum Assured 2.5 Lakhs, Yearly Premium 5655 & I have paid premium for 12 yrs now & Accumulated Bonus value is 110000 approx. can we get the bonus declared history for this plan from 2001 till now.

  2. Dear Ashesh, if you opt to surrender now. Invest those 1.3L Rs. & keep investing those 40K Rs. yly prem. @ 10% CAGR, the corpus value ‘ll be around 30.46L Rs. in next 19Y, i.e. in 2031. From then onwards, you may keep investing remaining prem. as well as can withdraw also as per the LIC policy calculations.

    As your query was for investment & return purpose, I’m discounting the insurance part of these policies.

    In my opinion, go for surrender.

    Thanks

    Ashal

    1. Dear Ashal, thanks for the reply. Glad to see that I also did the same calculation so at least I am learning something from you guys 🙂

      It seems i am getting closer to take a decision.

  3. Ramesh says:

    1. Long term debt returns (and that too of opaque non-guaranteed complex plans) never beat inflation.
    2. Long term equity returns CAN beat inflation, but there is no guarantee either.

    3. The bonuses (interim, final, etc) are not guaranteed (whatever the agent may have told you). The bonuses do not compound either. Hence, they are risky.

    4. You are in a painful condition, that is for sure. And since you are a stock, it is much more complex for you.

    It is entirely possible, that after shifting to equities, your returns do not match or overtake the already lost money in these policies (the chances are less over a long period of time, but there is no guarantee. Are you prepared to take that chance and not curse yourself, if that does not happen).

    In my honest opinion, instead of DIY, I would suggest you to get in touch with a decent financial planner who will look in a holistic manner this holy mess. Good luck.

    1. @Ramesh thanks for the reply. My intent was to explore the possibilities about which you stated clearly.

      I did hire the services of a “decent” financial planner but that is another story.

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