The real cost of surrendering a traditional insurance policy
Surrendering an endowment plan in year seven can cost you a third of what you paid. Before you sign the form, read the three options we lay out for every client.
By Sanjiv P, Founder
Dear clients,
This month, four of you asked us the same question in different words. "This LIC plan is giving me 5%. Should I surrender it and put the money in mutual funds?"
It is a fair question. The honest answer is: sometimes yes, often not yet. Here is how we work it out.
What surrender actually pays
Take an illustrative endowment plan. Annual premium ₹50,000. Seven years paid, so ₹3.5 lakh in. A surrender quote on a policy like this often comes in between ₹2.1 lakh and ₹2.6 lakh.
That is a loss of ₹90,000 to ₹1.4 lakh on day one, before you have invested a rupee elsewhere. The new investment has to earn that back first.
The three options we compare
1. Surrender. You get the surrender value now. Cover ends. Makes sense when you need the cash, or when the remaining term is long and the plan's return is very low.
2. Make it paid-up. You stop paying premiums. The policy stays alive with a reduced sum assured, paid at maturity. No further outflow, and no immediate loss booked. This is the option most people do not know exists.
3. Continue. In the last few years of a policy, the maturity value and bonuses are close. The return on the remaining premiums can be surprisingly high, because you are paying a little to unlock a lot.
How we decide
We calculate one number for each option: the effective return on every rupee you still have to pay. If continuing earns 8% on the remaining premiums, and a balanced fund might earn 9% with more volatility, we usually say continue. If continuing earns 3%, we look at paid-up or surrender.
We also check two things the quote will not show you. Does this policy carry life cover you still need? And is there a loan against it that changes the maths?
Before you sign
Do not surrender on the agent's quote alone. Send us the latest premium receipt and the surrender quotation. We will send back all three numbers in writing within a week.
A policy took years to build. It deserves a decision that takes more than one afternoon.
Warm regards, Sanjiv