Spend, Save and Invest Smartly

Is it Wise to Surrender an Endowment Life Insurance Policy?

One has heard a popular saying” You don’t need to pray to God any more when there are storms in the sky. But you do have to be insured. This basic saying is one of the least followed quotes. Why does one purchase life insurance? The word “life” in insurance indicates the financial protection provided to ones dependents in ones absence. In reality this is a totally forgotten concept. One purchases life insurance for investments and tax benefits forgetting one’s core needs which is providing one’s family a financial support if he is not around. When an insurance policy is purchased which is not of use eventually a time will come when it has to be replaced. This is a time one gets the short end of the stick. One needs to remember that life insurance needs to be purchased solely based on one’s need which is called insurance planning.

Remember if you buy things you don’t need, soon you will have to sell things you need.

Why does one purchase an insurance policy which does not meet his needs?

Many a time one purchases a life insurance policy just to benefit from income tax deductions under Section 80 C without understanding the basic essence of insurance. A term life insurance plan provides a death benefit to one’s dependents if he passes away. However if one survives the term of the policy there are no survival benefits. As one gets no investment or survival benefits he does not purchase this plan even though it has true value along with a tax benefit. One picks up an endowment plan which has high initial costs and huge commissions which go to insurance agents. This greed to make a profit namely a focus on twin benefits namely protection cover and an investment benefit results in mis-selling of policies by insurance agents to pocket huge commissions which might not be compatible to one’s needs. When one realizes this in desperation he surrenders the policy. Is this a good idea?

When can one surrender the endowment life insurance policy?

  • All insurance policies have a free look period after the receipt of the policy documents. This is essentially a period of 15 days. One can cancel this policy or shift to another policy during this time frame if he is unhappy with the features of the life insurance policy. One would get back the premium amount paid after the medical charges, stamp duty and the service charges are deducted.
  • What would happen if one finds the life insurance policy incompatible after the free look period has elapsed? One is now in a dilemma as an endowment life insurance policy has a guaranteed surrender value only after the premium is paid continuously for at least 3 years. One gets 30% of the basic premium paid over the 3 year term minus the first years premium .If one has paid INR 20000 annually for a period of 3 years he gets 30% of the second and third year premium. Nothing is obtained on the first year’s premium. One pays INR 60000 over a 3 year term and he gets a guaranteed surrender value of INR 12000 only. The best option would be to discontinue paying the premium after the first year and let the policy lapse. This can be done if one is dissatisfied with the policy within a year of taking it. Premiums are not refunded and it is best to surrender an unwanted policy within the first year and bear the loss. One needs to surrender the policy early if it is not to his liking within the first year itself.
  • One need not exit completely from a traditional endowment policy but can opt to make this a paid up policy. Under a paid up policy one’s policy is not void but continues with a reduced sum assured until the maturity of the policy. One gets a reduced sum assured and this amount is said to be the policies paid up value. If one has converted his endowment policy to a paid up policy after paying premiums for a period of 3 years any bonuses accrued would be paid on maturity of the policy. One would lose all future bonuses and dividends which are paid beyond this period of 3 years. Sum assured is obtained only at the end of the tenure or on one’s death.

How does one calculate the paid up value of an endowment life insurance policy?

One has taken up an endowment life insurance policy with a sum assured of INR 3 Lakhs. The term of the policy is 15 years. The premium is INR 15000 paid annually. One stops paying the premium after 3 years. What would be the paid up value of the policy?

  • One has to pay premiums for a period of 15 years.
  • One actually pays a premium for 3 years.

Should one surrender his endowment plan towards the middle stages of the policy?

The question running through one’s mind is what would happen if more than half the premiums of the endowment policy have been paid. Should one surrender the endowment policy? In this case the loss would be high as more than half the premiums have been paid. One must convert this endowment plan into a paid up policy. A paid up policy is not surrendered. One only stops paying the premiums due for the remainder of the policy till maturity. If one surrenders a policy without converting it into a paid up policy in a period before 5 years of taking it up all tax benefits claimed under Section 80 C are reversed. In the year one surrenders the policy all the income tax rebates are added up to ones income and tax has to be paid on it. This is a crucial factor which leads to one following the paid up approach.

If one is surrendering an endowment policy after 6 years of taking it up he needs to consider a special surrender value. An insurance Company pays a bonus at around 4% on the sum assured. As per the above example the sum assured was INR 3 Lakhs. Over a period of 6 years one would get a bonus of around INR 75000 at the rate of 4% on the sum assured.

One has what is known as the surrender value factor which varies for different insurance Companies. This depends on the premiums paid , performance of the fund as well as the years left for maturity. An insurance Company might have a surrender value factor of 40% for the 6th year. One has a paid up value of INR 60000 as shown in the above calculation.

One can calculate the surrender value = (paid up value + bonus ) * surrender value factor
Special surrender value = ( 60000 + 75000 )* 40% = INR 54000.

Should one surrender his endowment plan towards the end stages?

If one has held an insurance policy almost to maturity then it is not wise to surrender it at this point in time. One’s needs are best suited if the policy is held to maturity.

There is a famous saying “Be like a soldier .Know when to fight and when to surrender”. This basic saying means that one needs to be aware of his insurance needs at all points of time and surrender a policy only as a last resort. An insurance policy is purchased not for tax benefits or investment purposes but for insuring one’s life. This need must be recognized.

Term Insurance