Want to surrender your insurance policy? Don’t listen to random advice!

Published: August 5, 2023 at 6:00 am

Last Updated on August 5, 2023 at 8:44 am

I purchased two endowment policies last year and currently pay an annual premium of 2 Lakhs for these policies. Renewal for these policies is due next month, and I’ve heard that insurance policies are not ideal for investment due to their relatively low returns. So, should I consider surrendering these policies?

About the author: Ajay Pruthi is a fee-only *SEBI registered investment advisor. He can be contacted via his website plnr.in.

Previous articles by Ajay:

Typically, there are two types of suggestions you may receive from different individuals regarding whether policy surrender is advisable or not:

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  1. Individuals against insurance policies would likely advise you to surrender the policy and invest in mutual funds instead.
  2. Others might highlight the benefits of the policy, such as the sum assured and accidental benefits, and advise against surrendering it.

Both these suggestions are merely random advice on policy surrender and may do more harm than good.

Let’s modify the scenario and explain how it works.

I purchased two endowment policies last year and currently pay an annual premium of 2 Lakhs for these policies. The term for both policies is ten years. Should I surrender the policies in this case?

Even in this scenario, some may still suggest surrendering the policies. But should you follow their advice?

Policy surrender requires careful consideration based on several factors. Let us consider these factors one by one:


Let’s assume you surrender these policies after one year. As endowment policies typically don’t have any surrender value within the first year, you would face a significant monetary loss of 2 Lakhs. The crucial question is whether you can recover these losses in the next nine years.

For example, if you drop the policies and invest the future premium of 2 Lakhs per annum in debt mutual funds, assuming a 7% return, you would have approximately 24 Lakhs after nine years. On the other hand, if we assume a 5% return in the two endowment policies:

  • Invested Amount: 20 Lakhs
  • Value after ten years @ 5% returns: 25.2 Lakhs

The insurance maturity value would be tax-free, whereas debt funds may involve some tax implications. While liquidity is better in debt funds, it’s unnecessary to incur a loss when it can be avoided.

Therefore, there is no compelling reason to surrender the policy.

Risk Profile

It is crucial to assess your risk profile and understand the type of investor you are—whether conservative, balanced, or aggressive. Simply because others suggest that equity mutual fund returns are better doesn’t mean you need to invest in mutual funds.

Can you tolerate market volatility and keep your money invested in equity mutual funds?

Let’s assume you are a balanced investor and are willing to invest 2 Lakhs per annum in equity/debt mutual funds in a 50:50 ratio. After nine years, assuming a 9% return, you would have approximately 26 Lakhs. In comparison, with a 5% return in the endowment policies:

  • Invested Amount: 20 Lakhs
  • Value after ten years @ 5% returns: 25.2 Lakhs

For a meagre difference of 80,000, you would be exposed to significant risks associated with financial markets. Additionally, rebalancing and capital gains taxes would need to be considered. Furthermore, if you have specific goals associated with the amount after ten years, taking such risks for an additional 80,000 may not be advisable.

If the mutual fund returns drop to 8%, the amount after nine years would be 25 Lakhs. Thus, surrendering the policy is still not advisable.

Term of the Policy

In the above example, let’s consider increasing the policy term to 15 years. Does it make sense to surrender the policy in such a case?

For a conservative investor, surrendering the policy still doesn’t make sense, as the returns in most endowment policies tend to rise with longer terms. For a conservative investor assuming a 5.5% return in the endowment policy and 7% in debt mutual funds, the amount received would be the same (around 45 Lakhs).

But if you assume 9% returns in mutual funds, you would receive 52 Lakhs for the same duration. If the returns reach 10% in mutual funds over 14 years, the amount would be around 56 Lakhs.

In this scenario, you can think of surrendering a life insurance policy and investing in a mix of equity and debt instruments if you are a balanced or aggressive investor.


Tax implications are also a crucial factor to consider. The maturity value of an insurance policy is generally tax-free (subject to certain conditions), while other investments like mutual funds may involve taxation. This aspect should be considered when considering surrendering a life insurance policy.

In conclusion, there is no definitive answer regarding surrendering a life insurance policy. This decision should be based on your risk profile, expected returns, policy term, and taxation implications. Deciding based on your financial situation is important rather than relying on random advice.

Make informed financial decisions and happy investing!

Disclaimer– Nothing in the article is a solicitation, recommendation, endorsement, or offer by the author or the editor. If you have any doubts as to the merits of the article, you should seek advice from an independent financial advisor. *Registration granted by SEBI, BASL membership, and NISM certification does not guarantee the intermediary’s performance or provide any assurance of returns to investors. Investment in the securities market is subject to market risks. Read all the related documents carefully before investing

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