This is in continuation to the earlier “Part 1 – Should we exit an insurance policy through surrender or paid up?” It explains your eligibility for the options depending on the kind of traditional life insurance policy you have, when it has been bought and how many years of premium have been paid. It also explains what you really ‘get back’ for each option.
In summary, there are 4 options.
1. Continue with your policy
2. Lapse your policy and exit
3. Surrender your policy
4. Convert it into a “paid up” policy
Taking the decision with your traditional life insurance policy is not so easy. The situation you are in is like being on a plane with its engines on fire! Will it make it to the nearest airport? Should you jump off the plane and hope you will be able to get the parachute to open? Or is there a better chance if you simply stay on board and just glide it to land safely on a nearby lake? Tricky, nah?
Taking the Decision on your Traditional Life Insurance Policy
Here’s an example of a traditional life insurance plan from a real customer which you will probably relate to, and which will help you to take a decision on your own policy. Please note that all numbers are rounded off for the purpose of illustration.
| Insurance Policy Type | Traditional Life Insurance Policy of ABC Insurance Company |
|---|---|
| Policy Bought in | Nov 2009 |
| Premium | Rs. 30,000 paid annually |
| Sum Assured | Rs. 5,00,000 |
| No. of Premiums to be paid | 16 |
| Term of the Policy | 25 years |
| No. of premiums paid so far | 5 (Nov ’09, Nov ’10, Nov ’11, Nov ’12, Nov ’13) |
| Total premium paid so far | 30,000 x 5 = Rs. 1,50,000 |
| Total accrued bonus so far | Rs. 1,25,000 |
| Current status of the policy | Active, In Force |
| Choices we have | Continue, Lapse, Surrender, Paid-up |
To understand each option, have a look at the table below or click here to view it full screen.
Option 1 : Continue with your policy
The yield for traditional life insurance plans is in the range of 4.5% to 6.5%. If you continue to pay premiums for 16 years, expect to get approximately Rs. 12 lakhs as all inclusive Maturity Benefit that is tax-free under Section 10(10(d)). The net yield works out to be 5.2%. Simple and clean.
Option 2 : Lapsing the Policy
Stop paying premiums and don’t do anything. If you have a lot of money and don’t care about the 5 premiums you have already paid, just sit quietly and lapse your policy. Pay no heed to the several reminder notices and lapse alerts that the insurance company may send you. Write off Rs. 1,50,000 and don’t blame others that you had no choice. You actually did.
Option 3 : Surrender the Policy
Go to the insurance company and tell them you want to surrender. As per the surrender values for premiums paid and bonuses mentioned in Part 1, you will get back Rs. 94,650. If you badly need money, this is indeed an option. But with a 15% loss, it is obviously not a sensible decision.
Option 4A : Convert the Policy to “Paid up”
If you are clear that you do not want to continue the policy, this is perhaps the most sensible option. Your policy Sum Assured is reduced and you can also expect to get about Rs. 2,81,250 on policy maturity – a yield of about 2.8%, but a positive yield nevertheless.
Option 4B : Convert the Policy to “Paid up” and Re-invest the Balance
Here’s another perspective. If you were to convert the policy to “paid up” PLUS start investing the remaining Rs. 30,000 for 11 years into other financial instruments such as PPF, Balanced Mutual Funds, Equity Funds, Sector Funds, etc. there is a chance that you will get higher returns, especially given the long duration. Of course, you should be reminded that these are riskier options than the traditional life insurance policy which comes with a large element of guarantee and near-zero risk. So higher risk, higher returns. Also, there is no life cover now.
If such an investment yielded 7% (net of taxes), the overall yield including the paid-up value for the first 5 premium installments would be around 5.3%, almost what you would have got had you continued the policy. Is it really worth taking the risk then?
But if you feel you can get 8% or 9.5% returns (net of taxes), the overall yield including paid up value can go up to 6.9%, equivalent to more than Rs. 4 lakhs extra in terms of value. Whether taking that higher risk is worth it, is entirely your call based on your judgment. And if you are unsure, just staying put and continuing with the policy is not a bad deal either.
Hope this gives you a fair idea. Do remember the following.
- If you have paid lesser no. of premiums, it is more likely that you can earn higher returns through other instruments.
- If you have paid more no. of premiums, it may not be wise to take that extra risk. Continuing with the policy could be a safer bet.
- If you have less than 10-12 years to go before the policy ends, you could continue rather than convert to “paid up”.
- If you have more than 10-12 years to go before the policy ends, the longer duration can help you get better returns through equity products, provided you are ready to take that risk and willing to forgo the life insurance cover.
We hope you got some clarity with these two articles. Good luck with your decision, and Godspeed! And the next time onwards, don’t get on board a plane that is unsure to reach its destination! 🙂
Life Insurance is mainly for protecting your family from the financial impact of unforeseen events like your death. The ideal plan to buy is a term insurance plan. Here’s more on the benefits of term insurance.
To connect with one of our Trained & Certified Insurance Counselors, please call our Customer Care No. +91 1800 2121 344
Our pleasure Sir.
its really helped me, after reading u part1 & 2 artical thought to go option 4B.. thanks a lot
thanks for prompt and early reply as expected
will ponder over the points as mentioned by u
with regards
Adarsh, you have analysed the options perfectly, i.e. continue, surrender with a loss, or stop paying premiums.
1. As shown in the table in the article above, expect ~ 5.5% returns if you continue, 100% loss if you stop paying premiums and about (minus) 15%, i.e. partial loss, if you surrender. The best option (if you do not wish to continue) is to make it a paid-up policy. Go to the branch (not the agent) and get it done and get an acknowledgement from the company. You will get ~ 3% return at the end of the term which is better than losing the money. You have not mentioned how long you have been paying. Do check the eligibility of your policy for converting it into a paid-up policy.
2. Adarsh, these policies are clearly not fit to work as a plan for child’s education. You need to get at least 10% return (with some risk) over the long term, else you will not be able to beat education inflation, i.e. the rate of increase in the cost of education, year on year. We would recommend mutual funds for this purpose.
3. But you have missed out the most important product, which is, TERM INSURANCE. It is vital to have one especially since you have dependents and it is extremely cheap. You don’t need to buy any other insurance product.
We would be happy if you buy a Term Insurance plan for yourself so that your family is always protected in case of an eventuality. And of course, we would be happier if you buy it through us 🙂
Here is the link to do just that.
https://www.mintwise.com/term-insurance-compare
or
https://www.mintwise.com/term-insurance-compare
Hope this helps you.
Surrendering / stop paying premium / continuing the LIC policy
hello
i m adarsh,36 yr old
i m a professional
i have jeevan anand policy (2Lk SA -20 yr term ) in my name and in my wife’s name
i have child career plan (184) in my daughter’s name
annual premium of all 3 drops down to 31000/-pa
my annual income is 4Lk pa
now i am realising that this is not a better option
i know that if i surrender it i will be under loss
my doubt is ..should i continue /stop paying premiums ?
how much i will get if i stop paying premiums at maturity ?
i heard term plans are better ..should i go for it ?
plz advice
thanks in advance
Mohammed,
Age is immaterial here, it is used only for premium calculation.
Yes, your calculation on returns on conversion to paid-up is broadly correct for the 1st policy. The bonus part – do check with the company for 2014. You will get this amount when the paid-up policy matures in 2028 (tax-free if Sec 10-10-d stays). You can use similar calculations for the other policies as well.
May not be a good deal, but that’s the best you can get if you choose this option. At least you will get positive returns.
The surrender option will make you lose quite a bit and your returns would be negative. And of course, do remember, you have the option to continue the policy as well.
Thank you so much for answering, could you please help me understand the math please?
If I am calculating for example – 1st policy 10% of sum assured will be 35139.50 + I think the bonus for the 1st year is around 20-30k. So 55k to 60k in 2028? Am I right?
1st Policy Sum assured is 3,51395.00, Policy term is 14 years, payment term is 10 years, paid only 1st year premium of 49,900 in the year 2014.
2nd Policy Sum assured 7,15489, Policy term is 14 years, payment term is 10 years, paid only 1st year premium of 96,033 in the year 2014.
3rd Policy is Sum assured 7,14740. Policy term is 14 years, payment term is 10 years, paid only 1st year premium of 96,032 in the year 2014.
What will I get, If I continue as paid up – the maturity date is year 2028.
Note: Life assured age is 22 on 1st policy, 33 on the 2nd and 34 on the 3rd policy.
Thank you Sir!
Hi Mohammed,
Do not go by what others tell you about the plan. I am sure you can do some research yourself. To help you, here is the link to the brochure of the plan from the company’s website.
https://www.aegonlife.com/download/file/fid/1534
You can download the pdf document from the above link. Once you do that check the point on “Discontinuance of Premium” on page 4 (towards the last part).
————
On non-payment of premium any time after payment of first policy year’s premium in full, the policy will not lapse but will continue with Paid-Up Sum Assured.A Paid Up policy is not entitled for any future bonus or Money Back Payouts. Paid Up Sum Assured along with the accrued bonuses will be paid on death or maturity whichever occurs earlier and the policy will terminate upon such payment.
Paid Up Sum Assured on death = (Total premiums paid / Total premiums payable over the policy term) x (Higher of 10 times of annualized Base Premium or Sum Assured).
Paid Up Sum Assured on maturity = (Total premiums paid / Total premiums payable over the policy term) x Sum Assured – Sum of Money Back Payouts already paid.
Please note that a Paid Up policy can be surrendered within the policy term also, as per the calculations mentioned above.
—————-
Ideally, one should continue an insurance policy that is past the free-look period, by paying the premiums and taking all the benefits of the policy. But in your case, rather than losing all the money already paid, if you intend to convert the policy to paid up and then waiting for maturity, you are likely to get 10% of your Sum Assured + Bonuses. This will not be less than the premium already paid, but you should check that with the company directly. If you need any help in reaching out to the right person, do let us know.
Also, in case you convert to paid up, please ensure you take an official confirmation of having done the same, from the company. Also note that death benefits will cease or get reduced accordingly.
All the best, Mohammed.
Hello Sir,
Good day!
Please give me the clarity for the below queries. Your expertise is highly obliged.
I apologize for any spelling/ writing mistakes and lengthy complicated questions in advance.
1.My father took 3 traditional life insurance policies in year 2014, i.e. Aegon Religare Flexi money back advantage insurance plan for which the premium payment term is 10 years and the policy term is 14 years. (Life insured are his sons and daughter).
My father had paid only 1st year premium (1lac + 1 lac + 50k = total 2.5 lacs for 1st year) on all the 3 policies and per this policy if at least 1st year premium is paid the policy gets paid up (usually its 3 but for this policy it is at least 1 year).
My father cannot continue further more. Some agents have told my father that if he leaves the policies as paid up, and claim the invested money in year 2028, he might not 2.5 lacs but rather the amount might go in -ve or more or less he might get 10% of 2.5 lacs. Some agents are saying that he will get his 2.5 lac + some interest + bonus if any of the 1st year. Please help me understand as we all are very confused.
2.My father took another policy form Birla sun life (life insured is me – his son) i.e. Vision life income plan with pay term of 15 years in the year 2013 and annual premium of around 1 lac. Policy term is till the age of 100 years and maturity date is 2083. Last premium due is the year 2027.
3 years premiums have been paid i.e. 2013 to 2015 and the policy can be considered as paid up. Same concern, whether down the line this 3 lac amount will get deducted with hidden charges as the agents described (fund management etc,) and we get 0 to –ve amount once the policy gets matured or will he get 3 lacs in the year 2083?
If yes, this looks too long, any suggestions on what needs to be done for this policy please?
Thank you very much Sir for answering!
Amjad.
Sorry, we missed your second query, Gopal. Yes, if you stop paying the policy will lapse. No, your money is not ‘safe’ if you pay for 3 years. You only get the chance to make it paid up, but your policy will indeed lapse if you don’t pay further premiums, and you will lose all the money you have paid. In simple words, take a decision – if you want to convert it to paid up, you need to go to the branch (or to your agent) and make sure you get a letter/confirmation from the insurer that it is converted into paid-up.
You should ideally go in for a term insurance plan if you are looking for life cover. High cover for very low premium. Here’s where you can check which one is best for you.
https://www.mintwise.com/term-insurance-compare
If I didn’t do anything, is my policy going to lapse? when should I go for paid-up? My agent assured me that as I paid for more than 3 yrs.. my money is safe.. we planned to start a new policy by next year.. considering rider benifits, critical illness and partial disability.. please advice me.. the old one is retire and enjoy policy..
Gopal, based on whatever you have mentioned, it appears you are not keen to continue with the plan.
To convert into paid-up, you need to approach an LIC Branch with your original policy doc and tell them you want to convert to paid up policy. Once it is done, whatever bonuses you have earned and the other proportionate benefits of the policy can be received after the end of the original term of the policy. Remember that life insurance cover will stop.
What is paid up policy? I paid 2.5LPA for 3.5 years.. I stopped responding to LIC since 6 months.. what should I do now?
Ram, we think you mean more than Rs 13,41,107 which is @ 9.50% in the example above. The Rs. 2,81,250 is the surrender value.
You are absolutely right about equity – we have mentioned it as the fourth bullet point in bold towards the end of the article.
Indeed investing in equities is a great option and we strongly recommend it. And 12% (net of taxes) is indeed possible. Do remember, as we mentioned in the article that it also comes with risks. So from a risk-return point of view, it is a high risk-high return option, which is far different from the low risk-low return traditional insurance policy which is what you had invested in in the first place.
Also remember, you need to get life insurance since you would lose that when you surrender the earlier policy.
Ram, I think you mean more than Rs 13,41,107 which is @ 9.50% in the example above. The Rs. 2,81,250 is the surrender value.
You are absolutely right about equity – we have mentioned it as the fourth bullet point in bold towards the end of the article.
Indeed investing in equities is a great option and we strongly recommend it. And 12% (net of taxes) is indeed possible. Do remember, as we mentioned in the article that it also comes with risks. So from a risk-return point of view, it is a high risk-high return option, which is far different from the low risk-low return traditional insurance policy which is what you had invested in in the first place.
Thanks for the article. It was helpful.
One Quick question: How about the option of surrendering the policy and investing that amount in equities, wouldn’t that give you better returns? (for example, wouldn’t that give you more than ~2,81,000)?
Thanks for the article. It was helpful.
One Quick question: How about the option of surrendering the policy and investing that amount in equities, wouldn’t that give you better returns? (for example, wouldn’t that give you more than ~2,81,000)?
Nice explanation. I think option 4b is best for me. Once again thanks for eye opener articles on insurance.
Nice explanation. I think option 4b is best for me. Once again thanks for eye opener articles on insurance.
That may work better for you. Good decision, Mihir.
That may work better for you. Good decision, Mihir.
Superbly explained and very comprehensive! I have already paid 6 premiums for my LIC Jeevan Anand policy. I think it is better to continue rather than exit or make it paid up. Thanks for this article, mintwise!!!
Superbly explained and very comprehensive! I have already paid 6 premiums for my LIC Jeevan Anand policy. I think it is better to continue rather than exit or make it paid up. Thanks for this article, mintwise!!!