A friend sent me a long list of life insurance policies that he had. It was only long – and literally carried no weight. None of the life insurance was bought because he needed insurance. The people who sold him policies were his doctor’s wife, his wife’s aunt, a colleague, a bank Relationship manager – you get the drift, right?

So he tried surrendering one of the plans. His conversation went like this:

Friend: Hello  X life insurance company, I wish to surrender my policy no…..

Insur company: Sir you have paid Rs. 7 lakhs as premium, the policy is worth Rs. 10 Lakhs, why do you want to surrender?

Friend: I just want to surrender

The whole conversation was too long, will do a post on that later.

He then went to another person whom he showed the policy. That man told him:

• Traditional products have high charges: But once you have bought a policy, you have already gone past the high charges since the charges are front-loaded. Surrendering it will only help the insurance company, not you. If you are facing a financial crisis, partial withdrawal or loan is an option.

I want to know how many of you think this is right advise? your views please?

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  1. All traditional life insurance policies should be surrendered at the earliest unless one has paid more than 80% of the premiums. Staying with these plans only increase your losses. Surrender these policies and invest the money in PPF and equity funds – you shouldn’t go wrong. Anyway, further premium payment should not be made at any cost – at least, these policies should be made paid up.

  2. Dear Subra, Partial withdraw from a Traditional plan? Taking loan on such traditional policies is like paying 5% earning on that policy from our own money & then paying another 4% as commission fee for that 9% interest paid on these loans. My take ‘ll be to go for a surrender or close the plan just now. This is my view & I do not know if there is something missing in the piece of advise I’m unable to click.

    Thanks

    Ashal

  3. True, the big charges are front loaded. But there are also recurring charges that are quite significant atleast 2-3% p.a. + mortality charges that move up every year. All the initial high charges are already sunk, there is still no way that sticking with the same policy will ever recover those sunk costs, but will entail more high recurring costs. It would be wise to escape the Sunken Cost bias and move on to a better product, with a better structure, basically a term plan + PPF/Equity MF portfolio.

  4. excellent answer Ashwin. Sunk cost bias is not something advisors understand, nor does the media understand this. You can see ‘responsible’ media people giving this stupid advise saying ‘you have already incurred the high charges’.

    what to look for is ‘if i put another Rs. 100,000 into that policy will be able to salvage > Rs. 100,000 from that policy. If that answer is NO, dump it. Mistake already made, now you are just acknowledging it.

  5. Inquisitive Investor

    Hi Subra,

    You keep advising people to do SIP in good equity funds. At the same time you know that last 20 years and next 20 years may not be same from returns point of view. I keep hearing from a few friends that in 1990s govt took a lot of steps which led to liberalization and hence economy improved. But now there’s not much that can be done by the govt, or even if something can be done, Govt may not be interested in it..Given this status, do you think we can get returns of at least 12% CAGR in the next 20 years? Also tax laws may not be the same. If Equity MF returns are taxed, they might turn out to be worse than PPF. Given these risks, is it prudent to put significant amount in debt too, even for retirement corpus? My retirement is at most 25 yrs away.
    When a lot of people who’ve successfully reaped returns so far through MF SIPs also talk against it these days, it’s really scary. Also, SIPs started around 18 months ago show green only due to cost averaging and not because of growth. Interested to know what do you/your readers say about these points.

    Thanks and Regards

  6. Interested to follow the discussion thread. Ashwin has answered the question but interested to follow the discussion.

  7. Hi everybody,

    Can somebody clarify which is the better option of surrendering ULIP?

    1. Stop payment and immediately surrender the policy.

    2. Stop payment and 1 year later surrender the policy.

    What is the tax situation in both cases?
    Or should we forget the taxes and just surrender it?

  8. In a journey, we at time do commit mistakes. Carrying the mistake makes no sense. Correct it the moment you get to know.
    Stepping back is not failure. Failing to correct your fault is failure.

    Evaluate practically and take the right decision. As vinod said, if you already paid 80% of yoru premium. Pay the rest and get out.

  9. Dump the current policies. Insurance is to fundamentally cover risk, not generate returns. In the former the product is unique, in the latter its more of a commodity. So the return part needs to be weighed dispassionately, depending on what is your risk appetite. MF, primary market, gold , real estate- what ever is one’s fancy.

    My big crib about Life insurance is the average person (including the average CFO) looks at insurance policies as though they MUST provide a return.

  10. sunk cost bias is the the trait that repulses people from term policies and prefer money back schemes

  11. Not at all pravin. Sunk cost fallacy is NEVER with an expense, it is with an investment. When it is with an expense, you try to USE the product, IMMATERIAL of whether you have to, like to, or must.

    Remember the Zen story of eating chillies, because he has paid for it? that is sunk cost fallacy. I have done a post on sunk cost fallacy.

    Refusing to buy Term is lack of financial understanding, that is all.

  12. Pravin has a point there.

    Being a CFP, I have always noticed this trait with people when they calculate no. of premiums paid x no. of years and arrive at the conclusion that it is plain stupid NOT to get anything back even though they have SURVIVED the policy tenure. I still remember the look my Bro-in-Law gave me when I told him to dump his Endowment policies (Paying about Rs.40000 plus annual premium for pathetic 3-4 lac SA. By the way, he is a doctor. The biggest mental block against term plan is “I am not getting anything back” syndrome. Further, your friendly neighbourhood Insurance agent tries to dump his favourite policies on not so hapless customer by showing how his money is “going down the drain.” Ever wondered why “term plan with return of premium policies” were inveneted in the first place?

    The same people will gladly pay about Rs.15 – 20 K annual premium for their vehicle insurance for Rs. 6 Lac SA, will never crib that they paid this premium for nothing (after all, who likes to get his vehicle involved in an accident), missing the point that as per their thinking it still is money being “going down the drain” BUT they will never pay Rs.12000 annual for 50 lac SA for Life Insurance.

    The difference, I think, is in the perspective. When it comes to Insurance, we tend to think of it as investment. Logically, it should be an EXPENSE to reduce risk. When we separate Investment from Expense, the attitude shifts dramatically.

    We all keep fire extinguishers at home, offices, even in vehicles etc, getting them renewed/refilled regualarly. But I am still to find anyone who is unhappy that despite having fire extinguishers for so many years, they never had a fire in their home/office/vehicle.

    Period.

  13. subra – someone said on another forum “Do you want to cut your fingers now or amputate your hand later” :). I suggest get out of the policy, but before that make sure he has term insurance done… just in case… life is uncertain you see 🙂

  14. In year 2007 I paid ulip policy in one private insurance company. Premium amount is Rs.24000 per year.At the time of opening policy agent told me to pay minimum three years. Not necessary to pay after that. I paid three years and left. I haven’t pay any amount after three years. Totally I paid Rs.72000. But few day back I got letter from insurance company,says my policy has been lapsed. They are going to settle my policy value of Rs.30500 only. I lost 43000 and interest for last 4 years.

  15. @Shankar – Did you ask your agent about this? Did you understand the product charges when you bought the policy? Did you calculate the policy charges in actual rupee terms for the period you intended to hold? If you have answered NO to the last 2 Q’s then, first thing i will advise is as of now calculate the charges, understand their impact for next 3-5 years and decide. Incase you are not adept in doing this calculation yourself, better consult a financial planner for a fee, and get your policies/finances analysed so that you can plan all financial decisions.

  16. My policy agent was one of the leading private bank in the year 2006-07. Few years back that bank was merged with another private bank. This private bank is having separate insurance company. The employee of the bank, from whom I enrolled this policy has left the job. I inquired that bank about my policy.They said they doesn’t have nay records to assist me. Definitely I need some financial planner for for investment. Hereafter I need to follow that. Thanks Aswin.

  17. Why cant these ULIP fraud companies be closed and their management be put behind bar? So much has been cheated from so many and it is just left to someone to cry.

    these guys have cheated from most needy people and that is more criminal than a robbary or steal.

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