Which policy should I surrender and which one should I make paid up?

POSTED BY Noob Investor ON February 2, 2014 5:25 pm COMMENTS (7)

Hello

I am 21 years old and run a web design business. My financial knowledge is pretty weak. Since last weeks I am reading Jago Investor and few other blogs and have been trying to get a hang of some basic concepts.

Recently I got to know from my father about the LIC policies which he enrolled for for me and himself. On reading Manish’s article, I got to know how useless LIC policies are and don’t fetch a return of more than 5 percent per annum (i.e. below the inflation level) and how that money can be effectively invested in other avenues such as PPF, Recurring Deposit etc

Unfortunately my father was misguided by one of his so called friend, a LIC agent which he mistakenly assumed as his financial advisor and enrolled for numerous policies for me and himself.

Here are the details of the 10 LIC policies he signed up for – http://prntscr.com/2olt8x (click on screenshot).

I need advice from JagoInvestor community as to which particular policies should I surrender and which ones should I make them paid up.  Note – My father doesn’t have a term insurance plan so please suggest accordingly (he is 51 years old).

Thanks a lot!

7 replies on this article “Which policy should I surrender and which one should I make paid up?”

  1. ashalanshu says:

    Dear Noob, in case of your father, the prem. payment is high and yet sum assured is lower so surrender value ‘ll be less and also the time frame is not much to recover losses from surrender value. so the only option is to continue.

    Thanks

    Ashal

  2. divya.advisor says:

    Here is how to calculate final returns at today’s bonus rates and final addition bonus.
    Take example of first policy on list Table no 14, SA=20L, term = 31
    Last declared Bonus on table 14 for term 21 yrs and above was= Rs. 48 / thousand
    so total yield from bonus is:
    A=BONUS RATE X (SUM ASSURED /1000) X TERM OF POLICY
    A = 48 X 2000 X 31 = 2976000

    Final addition bonus for a policy term 31 years was Rs 13000 / thousand when SA was more than 2 Lakh

    so B = FAB X (SUM ASSURED /1000)
    B = 1300 X 2000 = 2600000

    FINAL MATURITY PAYMENT = SUM ASSURED + A +B = Rs. 7576000 /-

    I am also not sure if your time horizon was just 4-5 years why did you opt for policy term that was 31 years. You bleed a lot when you surrender after 4-5 years.

  3. Noob Investor says:

    Thanks Ashalanshu, can u please tell why do u advise to keep dad’s policy as of now. Is it because of loan which has been taken against those 3 policies.

    Another question, how can I know the maturity value that I will get after the term ends. DivyaInvestor mentioned maturity amount is not correct so I am a bit confused.

  4. ashalanshu says:

    Dear Noob, do nothing for your dad’s policy as of now. Regarding your own policies, the 3 policies opened in 2012, you need to dump right away. Even after paying more prem. you can not earn any meaningful profit from these policies. So book loss.

    For 2009, 2010 and 2005 policies, you are eligible for surrender value. Claim it and invest in bank FDs under your sister’s name or mother’s name.

    Thanks

    Ashal

  5. ashalanshu says:

    Dear Noob investor, before I make any comment on your portfolio comprising 6 endowment policies, can you face your father and answer his counter queries as you are a kid of just 21Y old (as per your parent’s understanding for you). Can you take bold financial decisions even though your parents are against it?

    Thanks

    Ashal

    1. Noob Investor says:

      @ashalanshu. My father is quite understanding in general and doesn’t think I am a kid. If my arguments are strong and I can prove to him the ROI on RD, FD and PPF is better than LIC endownment, then there is no reason why he will be against it. I have been working since 2-2.5 years and I always have a say in financial decisions of the family. At the moment, he thinks he will get atleast something so I need to convince him with numbers but before that I need to understand everything. Thats why I am seeking your guidance.

      @Divya. Can u please explain how did u calculate maturity value. The maturity value of 57 lakhs was provided by LIC agent.

      I am not interested in MF at the moment. My time horizon is 4-5 years for investment (need money for my sister’s and my marriage) so I am only interested in safe investments which should be easily liquifiable at that time. I want to get out of bad investments/policies so that money can be channeled in better things such as RD/FD etc.

      I skipped one very important thing. We have taken a loan of 2.25 lakhs from these 3 policies http://prntscr.com/2oywy3.

  6. divya.advisor says:

    For a policy to be paid up it needs to run for minimum 3 years. I also can tell you your calculation on maturity value for these policies is wrong. Take for example your first policy in the snapshot
    SA= 20 Lakh
    Term: 31 years
    so if you consider the last bonus rate and final addition bonus declared by LIC you sh0uld get maturity of 7576000 and not 57 lakh you mentioned.
    I agree with your assessment that you have probably invested in more endowment plans that you should have. Try to keep few as part of your debt portfolio. Diversification is necessary. Before you jump to mutual funds do a good research there are mutual funds who have delivered even less than savings account in the past. So choose wisely. PPF investment upto 1 Lakh per annum do not even think go ahead and put it.

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