Opportunity cost vs premium loss: When to surrender your policies
NEW DELHI : Traditional life insurance plans, often known as endowment policies, are frequently marketed as investment products. However, with growing awareness about the importance of separating insurance and investment, many policyholders are now questioning whether to continue with their existing plans or surrender them. This decision is not straightforward, as the cash value received upon surrender is usually significantly lower than the premiums paid.
For instance, a client approached 1 Finance, an investment advisory firm registered with the Securities and Exchange Board of India (Sebi). He had an extensive portfolio of 13 endowment policies, with annual premiums totalling nearly ₹3 lakh and a life cover of ₹75 lakh. Having paid ₹43.50 lakh in premiums, he faced a critical decision.
Manju Dhake, vice president-insurance at 1 Finance, recommended surrendering 12 of the policies, estimating a surrender value of ₹33.15 lakh. This would mean an immediate loss of ₹10.35 lakh or 24% of the premiums paid. However, Dhake emphasized that this strategy would minimize overall losses.
“The rationale behind this advice was grounded in the belief that the cumulative yield across all policies was unlikely to surpass 5%," she explained. Dhake advised the client to separate insurance and investment needs. She urged him to maintain a single fully paid policy and purchase a term plan worth ₹3 crore to address any gaps in mortality protection.
This term plan, costing nearly ₹57,900 annually, would result in net savings of ₹2.41 lakh. She suggested reinvesting these savings in high-quality instruments like mutual funds and the National Pension System (NPS) for potentially higher returns. Deciding whether to surrender an insurance
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