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POSTED BY ON March 24, 2014 5:44 pm COMMENTS (12)
Hello all,
I have a question about my LIC ULIP policy. Policy is LIC profit plus growth. I bought it in november 2007. premium was 15k per annum and it had to be paid for 5 years and policy duration is 20 years. I paid all 5 premiums i.e. in total 75k. today the value is 82k. I checked online and found that after 5 years there will not be any deductions if i surrender my policy. now the question is should i surrender?? OR should i keep it as it is and let the fund value grow?
Insurance for this policy is only 2lac. i am not in need of money at the moment i can keep the policy intact. If i surrender i can use the money to make some part payment of my home loan where the outstanding principal is now only 1.91lacs. OR third option is take out the money and invest it elsewhere like liquid/debt fund.
What should i do? Do you think i will get higher returns if i keep my policy intact? Will power of compounding help me if i did not surrender it?
Thanks in advance.
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Dear Nikhs, Many a times people get irritated with my continuous counter questions. Believe me, I do want to help each one of you but not by spoon-feeding. I w’d like that everybody should reach to his/her answer by using his own brain. Just like you did right now. Thanks for understanding my point.
Thanks
Ashal
Dear Nikhs, yes the calculation is correct. Now you can make an informed choice based upon mathematical calculations and not merely what me or someone else suggests. 🙂
Thanks
Ashal
Thank you very much Ashal. I will use the amount to prepay the loan. Also i would like to say your approach of asking questions rather than giving answers is very good. Because of your questions It forced me to do the calculation (however u told me what exactly needs to be calculated :)) . which helped me to understand the calculation and reach to a conclusion. Thank you very much again. kudos to u 🙂
Dear Nikhs, yes. Now can you see on your own, what’s beneficial in your personal case?
By repaying loan, your interest saving is 16340-5450 = 10890.
Now can you earn post tax more than 10890 Rs. from your 80K amount in next 18 months? If answer is yes, do not prepay. If the answer is No, Prepay.
Thanks
Ashal
hello Ashal,
So here goes complete calculation:
Scenario I: Dont prepay loan and invest 80k for 18 months. considering FD since 18 months is short term. (correct me if i need to consider other product to invest)
Total amount repay through EMI = 11565*18 = 208170
Outstanding Loan amount = 191830
so interest = 16340
tax saving on this interest : 3366
net returns : -16340 + 3366 = -12974
interest on 80k for 18months considering 9% interest rate: 11426
tax on interest amount : 2354
net returns : 11426 – 2354 = 9072
So overall net returns: -12974 + 9072 = -3902
Scenario II: prepay loan with 80k
Total amount repay through EMI = 11728*10 = 117280
Outstanding Loan amount = 111830
so interest = 5450
tax saving on this interest : 1123
net returns : -5450 + 1123 = -4327
if i invest EMI of scenario I which is 11565 for remaining 8 months with 8.5% interest rate (considering RD as product here)
Interest : 3319
tax on interest = 684
net returns : 3319 – 684 = 2635
overall net returns : -4327 + 2635 = -1692
So in Scenario I total net returns are -3902 and in Scenario II total net returns are -1692. So i prepayment of loan looks better approach.
Is my conclusion and calculation here is correct? Please let me know if i am missing anything.
Dear Nikhs, there seems some calculation mistake. How? Sample this.
Total EMI to pay = 18
EMI amount = 11964
Total amount repay through EMI = 11964 * 18 = 215352
Outstanding Loan amount = 191000
Hence remaining interest = 215352 – 191000 = 24352.
Now I need you to calculate, how much interest ‘ll be there on you if you opt to repay this 80K Rs. into home loan and thus maning balance loan amount around 111000 Rs?
Thanks
Ashal
hello Ashal,
i was wrong. EMI amount is 11565. Here is the exact calculation.
Total EMI to Pay : 18
EMI amount : 11565
Total amount repay through EMI = 11565*18 = 208170
Outstanding Loan amount = 191830
so interest = 16340
now if i repay 80k
my outstanding loan amount = 191830 – 80000 = 111830
If i keep EMI near to the one which i am paying now it will come to 11728.
So with EMI amount = 11728
Total EMI to pay = 10
total amount repay thru EMI = 117280
so interest = 117280 – 111830 = 5450
Let me know if this is the answer to the question you asked?
Dear Nikhs, please read my above reply again. If you make a financial choice, the money should not be used for repayment of home loan but be invested for next 15-20Y (subject to your loan term). Calculate it’s value @ even 8% yly return and check the figure with the saving you can make in home loan repayment in terms of interest outgo and post me your results.
Thanks
Ashal
hello Ashal,
my remaining loan term is now just 18 months and monthly EMI of 11964. So if i invest 80k which is my ULIP value for next 18 months with considering compounding will happen monthly and with interest rate of 9% i would get 91,516.83.
where as on home loan i would be paying around 16339 rs as interest if i continue to pay my current EMI for 18months. (this value of 16339 comes from one of the calculator manish provided).
These are my results. I hope i understood your q correctly.
Dear Nikhs, surrender and repay your home loan. It’s not a financial choice but an emotional choice for you. In case you want to make a financial choice, surrender and invest for long term in an Eq. MF.
Thanks
Ashal
hello Ashal,
I did not understand why paying home loan is emotional choice? Can you please explain?
Take a view, how much is the money growing every year in this ULIP. Check the historical data to assess. Off course no one can predict the future, but it will give you a general idea. Also note the charges being deducted every month from the fund balance. This will be related to admin charges, mortality charges etc. After taking this into account, see if the money is growing more than at least 8% every year. If not, isnt it better to put it in FD or invest else where?
Since you dont have to pay any more premiums, you can afford to wait and decide