To Surrender, or To Make Paid-up, that is the question!

Thanks mainly to personal finance bloggers, more and more individuals are recognising to the need to treat inflation as the benchmark for long-term goals. With this comes the inevitable realisation that investments that have an insurance component in them - endowment plans, money-back plans, traditional with-profit plans and market-linked ULIPs etc. are unlikely to help them achieve their goals.

This is because the poor return offered by these policies - (5-7% tax-free) for traditional plans - implies for a person to meet long-term goals, the premium will have to much, much higher than what they can afford.  This is the only way to beat inflation with such products.

Since most people cannot afford high premiums, the only other option to beat inflation is to invest the amount in assets that can result in a return higher than inflation after taxes. The natural choice is equity.

However, before the person can begin equity investments, the question of what to do with existing 'junk' policies must be answered.

I have taken up this issue from a logical standpoint earlier:

In this post, I would like to offer a simpler thumb-rule approach to this issue while not diluting the associated logic.

Step 1: Do I have enough life insurance? If yes, proceed to step 2. If not, find out how much insurance you need,

  • with this tool, if you have dependents other than children: Insurance Calculator for the Young 
  • and with this tool if you have children, comprehensive child planner
  • The above exercise with take no more than 30 mins.
  • You can declare your existing policies to the insurer and tell them that you intend to get rid of these once the term plan is issued.

Step 2:  Say this to yourself: I decide to stop paying any more premiums for worthless products.  I decide invest this sum productively as soon as possible, preferably from the current month.

This is the key step. Once you have decided to accomplish this, it does not matter whether you make the policy paid-up or surrender it. The exit option is irrelevant. The key is to head for the exit.

Making a policy paid-up implies, premiums stops but the relationship with the insurer continues with lesser insurance cover. At the end of the policy duration, the money due to you at the time of making the policy paid-up will be given to you. So the insurer retains the money (investing it to their benefit) and give it to you after (several) years.

Surrendering a policy implies all ties with insurer are immediately severed. The insurer pays a surrender value (much lower tha paid-up value) but pays it immediately.

fork-in-the-road
Fork in the road, decision tree, September, Discovery Park, Seattle, Washington, USA. Photo Courtesy: Wonderlane

Step 3:

(a) Some people ask,

"I have paid only one premium and have two more years to exit the policy. What do I do?"

Answer:  It is only money. Let it go. Stop paying further premiums.

or

"I have paid two premiums and have one more year to exit the policy. What do I do?"

Answer: You pay one more premium which you will lose anyway when you exit! Makes no sense. It is only money. Let it go. Stop further payment.

(b) If you have less than 5Y left in the policy period, best not to exit. Future premiums when invested elsewhere should be able to get about 7% after taxes. This may not be possible for those in 20% and 10% tax slabs.  Why take the chance?

(c) If you have 5Y-10Y left in the policy period, you can exit the policy and invest future premiums in a portfolio with limited equity exposure. Examples are debt oriented balanced funds (MIPs) or even equity-oriented balanced funds if you can understand and stomach the risk (not an easy task for those used to fixed-income products).

In such cases, should one surrender or make the policy pre-paid?

It is not about money. Not about in which option one would lose more or gain more.  It is psychology!

Paid-up offers some emotional benefits.  The perceived loss is lower. There is some insurer cover and it makes the insurer do some work for the worthless product that you have got from them.  The time value of money (paid-up amount sleeps with the insurer from investors point of view)  should be taken into account, but we are not applying logic here.

Surrendering offers different emotional benefits. You have cleared the slate: good riddance to bad rubbish*. You can now invest the surrender amount productively along with future premiums.

  • rubbish here is not the product or the agent who sold you the product, but your own lazy, uninformed avatar.

The question is not which option is better from a monetary point of view. The question is which option is better from an emotional viewpoint. Which would make you happy? Choose that option. Simple as that.

(d) If you have more than 10Y left in the policy period, exiting via surrender is the obvious choice. This is because both the surrender value and future premiums can be invested in productive assets.

Install Financial Freedom App! (Google Play Store)

Install Freefincal Retirement Planner App! (Google Play Store)

book-footer

Buy our New Book!

You Can Be Rich With Goal-based Investing A book by  P V Subramanyam (subramoney.com) & M Pattabiraman. Hard bound. Price: Rs. 399/- and Kindle Rs. 349/-. Read more about the book and pre-order now!
Practical advice + calculators for you to develop personalised investment solutions

Thank you for reading. You may also like

About Freefincal

Freefincal has open-source, comprehensive Excel spreadsheets, tools, analysis and unbiased, conflict of interest-free commentary on different aspects of personal finance and investing. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. We do not accept sponsored posts, links or guest posts request from content writers and agencies.

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete  the entire comment or remove the links before approving them.

20 thoughts on “To Surrender, or To Make Paid-up, that is the question!

  1. Rajanikant Gajjar

    Yes sir,It is really a simple rule of thumb.Simple enough for beginner to grasp.
    we request such simple articles more often.
    Hats off to your passion for personal finance.
    I have gained a lot.

    Reply
  2. Rajanikant Gajjar

    Yes sir,It is really a simple rule of thumb.Simple enough for beginner to grasp.
    we request such simple articles more often.
    Hats off to your passion for personal finance.
    I have gained a lot.

    Reply
  3. Paramjit Verma

    I wish to thank you for this timely topic. I have an AVIVA ULIP policy (20 years) and paying Rs. 60,000 towards annual premium. I have already paid 8 annual premiums (total Rs 480,000) and the current value is approx Rs. 600,00 and surrender value is approx Rs. 500,000. I am told by AVIVA that surrender charges after paying 11 premiums will be NIL. What should do in these circumstances?

    Reply
  4. Paramjit Verma

    I wish to thank you for this timely topic. I have an AVIVA ULIP policy (20 years) and paying Rs. 60,000 towards annual premium. I have already paid 8 annual premiums (total Rs 480,000) and the current value is approx Rs. 600,00 and surrender value is approx Rs. 500,000. I am told by AVIVA that surrender charges after paying 11 premiums will be NIL. What should do in these circumstances?

    Reply
  5. Manish

    Hi Pattu,

    Is there any rule or will it affect the chances of getting new policy if we surrender our old/existing policy?
    I came to know that underwriter may not issue new policy if we have a paid-up or surrendered policies of the same insurance company? Could you please enlighten more on the disadvantages(not monetary) if we paid-up or surrender our policies?

    Reply
    1. pattu

      It might but I dont think it is such a great problem. Insurers are aware that there is a choice. If they reject we can go elsewhere. Dont think this is a disadvantage at all.

      Reply
  6. Manish

    Hi Pattu,

    Is there any rule or will it affect the chances of getting new policy if we surrender our old/existing policy?
    I came to know that underwriter may not issue new policy if we have a paid-up or surrendered policies of the same insurance company? Could you please enlighten more on the disadvantages(not monetary) if we paid-up or surrender our policies?

    Reply
    1. pattu

      It might but I dont think it is such a great problem. Insurers are aware that there is a choice. If they reject we can go elsewhere. Dont think this is a disadvantage at all.

      Reply
  7. Jayanth

    Pattu Sir,
    I guess with all these years you have become a mind reader!! ..an Oracle of sorts ! .. I was just thinking about this issue , and lo behold! there is a post on the subject !!
    Only alert your readers that after making a policy paid-up , U will still get reminders that you have not paid your premia!! Also U get messages that all you old paap ( sin - since U stopped paying premium ) is absolved , and U can re-start policy by paying xxx !! .. They keep trying to get you back !

    Reply
  8. Jayanth

    Pattu Sir,
    I guess with all these years you have become a mind reader!! ..an Oracle of sorts ! .. I was just thinking about this issue , and lo behold! there is a post on the subject !!
    Only alert your readers that after making a policy paid-up , U will still get reminders that you have not paid your premia!! Also U get messages that all you old paap ( sin - since U stopped paying premium ) is absolved , and U can re-start policy by paying xxx !! .. They keep trying to get you back !

    Reply
  9. Jay

    Hello Sir
    I have below 4 LIC policy
    Policy Name Start date maturity date Amount Paid Insured value Bonus received Surrender Value(as on sep 14)

    Money Back 08/01/02 08/01/22 81,321 100,000 40,000 31,136
    Marriage endow/edu 03/01/08 03/01/24 44,593 100,000 Nil 29,952
    New Bhima gold 03/01/08 03/01/32 40,016 100,000 Nil 9,364
    Komal Jeevab 01/01/10 01/01/35 40,969 100,000 Nil 24,219

    Please advice is it good to surrender or make paid up

    Reply
  10. Jay

    Hello Sir
    I have below 4 LIC policy
    Policy Name Start date maturity date Amount Paid Insured value Bonus received Surrender Value(as on sep 14)

    Money Back 08/01/02 08/01/22 81,321 100,000 40,000 31,136
    Marriage endow/edu 03/01/08 03/01/24 44,593 100,000 Nil 29,952
    New Bhima gold 03/01/08 03/01/32 40,016 100,000 Nil 9,364
    Komal Jeevab 01/01/10 01/01/35 40,969 100,000 Nil 24,219

    Please advice is it good to surrender or make paid up

    Reply

Do let us know what you think about the article