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Why you should surrender endowment life insurance policies

Surrendering a policy would mean that a portion of the premium already paid will be refunded to you. If the policy has been in force for some time, you would get a good surrender value which can be immediately invested in products of your choice.

ET CONTRIBUTORS|
Updated: Nov 18, 2019, 11.40 AM IST
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Instead of being stuck with sub-optimal investments, surrender such policies.
Ashwini is 30 and works for a BPO. She has been a disciplined saver and investor for the past 5-6 years. However, her insurance policies are a cause for concern. She bought a few endowment policies primarily to save tax when she had just started working about seven years ago. Now, she finds that these policies neither give her the insurance cover she needs nor deliver very attractive returns. The premiums of these low-yield policies are a drain on her finances and prevent her from investing for her other financial goals. What are the options before invetsors such as Ashwini?

Ashwini’s requirements are two-fold: one is to get adequate insurance cover at a competitive price and two, being able to make better use of her funds which she is currently using to pay the premiums. The choices Ashwini has with her current policies are to let the policies lapse, surrender them or to make them paid up. If she lets the policies lapse by not paying further premiums, she will lose whatever she has paid as premium in the past seven years. Making the policy paid-up would imply that the cover will continue for a reduced sum assured over the rest of the term. While Ashwini will not need to pay any further premiums, the proportionate sum assured will be received only on the maturity of the policy. This can imply an opportunity cost, since the funds will remain blocked and earn low returns. The same amount if deployed in a better investment product can earn better returns.

Surrendering a policy would mean that a portion of the premium already paid will be refunded to Ashwini. Since Ashwini’s policies have been in force for some time, they would now have a good surrender value which can be immediately invested in products of her choice. She should also start a periodic investment programme on the money she saves on the premiums, so that she does not end up spending this amount. Taken together, the same outlay will give Ashwini a good insurance cover as well as investments.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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