“Where were you all these days? Why didn’t you come when I was making all these mistakes ??” asked Dr. Rajesh Sharma, a 32 year old surgeon, sitting on a sofa in his drawing room. Mrs. Ragini Sharma, his wife, came rushing out to see, whom is Dr. Sharma talking to ? To her great surprise, Dr. Sharma was talking to the T.V.!! “If you had told me these things earlier, I would not have made such mistakes!!” Dr. Sharma was complaining to the Television.

“Are you all right, Rajesh??” asked Ragini. “Do you know that you are talking to the television?”

“No, I am not all right at all. Every day I am reading and watching views that one should never mix investments and insurance. The advisors on T.V. keep telling that term plan is the best for insurance and SIP is the best for investments. Why didn’t these guys tell me all this 3 years back when I wanted to buy a new policy?” Said the worried Dr. Sharma.

“So what’s the big deal even if they tell it to you now?”asked Ragini.

“I have already bought an endowment policy 3 years back which was a combination of investments and insurance. The agent somehow convinced me to buy this endowment plan which will give me insurance, investments and tax saving. But now I have come to know that he just did this to earn good commissions. This plan is a total waste for me.” Said Dr. Sharma.

“So now that you know, what is really good for us, why don’t you close this plan and start a new plan?” asked Ragini.

“It’s not so simple. If I stop this plan, I will lose out the premium paid so far and also the life cover would cease.” Said Dr. Sharma.

“Well, in that case, let’s work on some numbers.” Said Ragini. “ How much premium are you paying for this endowment plan?”

“Around Rs. 1,00,000 annually. I am getting a life risk cover of Rs. 25 Lakhs and on maturity I will be getting an amount of around Rs. 47-Rs.49 Lakhs after 25 years.” Said Dr. Sharma. “But the guy on the T.V. says that with an annual income of Rs. 10 Lakhs, I should have a life risk cover of Rs. 1 Crore. Also, with a current expenditure of Rs. 40,000 p.m. , and assuming a long term inflation of 5.5% p.a., I would need a monthly flow of Rs. 1.5 Lakhs to live with the same living standards. This would require a retirement corpus of around Rs. 2-2.25 Crores. This cannot be achieved with the endowment plan I am paying premium for.” Said Dr. Sharma.

“Ok, Coming back to my original question, if you stop this plan today, what will happen?” asked Ragini.

“My Policy will lapse and the life risk cover would stop” said Dr. Sharma.

“And suppose you take a fresh term plan of Rs. 1 Crore, what will be the premium for the same?” asked Ragini.

“Not too sure, but should be in the range of Rs. 15,000-Rs. 16,000 p.a.” said Dr. Sharma.

“Ok and if you invest the balance Rs. 84,000-Rs. 85,000 systematically in mutual funds, what amount could you after 25 years ?”

“Near about Rs. 1.19 Crores.” Said Dr. Sharma.

“Then why do even bother whether your existing policy lapses or not ? Just forget that you had purchased any policy and that you were paying premium for the same. Start afresh and you will find that your goals are achieved without you noticing the loss of existing policy.” Said Ragini.

“Good thought Dear. But what about my existing policy? What should I do with the same?” asked Dr. Sharma.

“We have a couple of options. First option, surrender this policy and obtain the surrender value.” Said Ragini.

“But Surrender value will not be more than 50%-60% of what I have paid so far. I will be incurring a loss. The money which I paid towards the premium is my hard earned money.” Said Dr. Sharma.

“You are right” smiled Ragini. “But you didn’t do that same hardwork while buying a policy. You bought it in a hastened manner. When you make a mistake, there is a penalty associated with it. But should that prevent you from taking a corrective action when you realise it? Just to give you a medical example, suppose you come to know that your doctor is giving you a wrong treatment, would you still continue taking it just because you have already paid the doctor ? The best solution is to get over it, say a good-bye to the wrong doctor and move on to the right treatment.”

“Ok, let us assume that I decide to surrender the plan and book a loss. Now what ?” asked Dr. Sharma.

“This surrender value can be used to buy a single premium term plan. Suppose you get a surrender value of Rs. 1.67 Lakhs from this policy, you may buy a single premium term plan with this amount to get a cover of Rs. 75 Lakhs. And then you can buy a second term plan of Rs. 25 Lakhs which will only require an annual premium of Rs. 4000-Rs.5000 p.a.

This way, we will have an amount of Rs. 96,000 to be invested annually which will give us a retirement amount of Rs. 1.36 Crores.” Said Ragini.

“Wow !! Sounds great !! And what is the other option ?” asked excited Dr. Sharma.

Second option is to convert the policy into a paid up policy. This way, the cover would cease, but whatever premium you have paid so far, and the nominal bonus accrued on the same, will be paid to you on maturity. This amount will be so small that it will be meaningless, but for those who think that surrendering entails booking a loss, may go for this option.” Said Ragini.

“That’s great Ragini. So I still have an option to correct my mistake?” asked Dr. Sharma.

“We always have that option Rajesh. It’s just that we need to change the way we look at things. Whenever we realise that may-be we have taken a wrong decision, we start defending our decision than correcting it. Our ego does not allow us to book a loss. And due to this, rather than taking a corrective action, we continue making that mistake and when it becomes big, we only have regrets.” Said Ragini.

“You are absolutely right, Ragini. Even if we have made a mistake, we have an option to get over it. We just need to learn to overcome our ego, keep an open mind and take corrective action on the same.” Said Dr. Sharma.

We look forward to your feedback and comments on the above article. Please feel free to contact us on saurabh@nidhiinvestments.com if you have any questions.

(The views mentioned in the article are personal opinion of the author. The characters used in the article are hypothetical).

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15 Comments

  1. This is one article relating to perhaps each one of us. Many of us have bought some kind of a wrong policy out of impulse and are now regretting it. This article helps a lot to come out of it !!

    I wanted to ask, what can I do for a policy for which I have paid only one premium ? How much will I get back ?

    1. Thanks for the compliments Sir.

      About your query, you are lucky to realise early that may be you are into a wrong policy. So please do not bother surrendering it. You wont get anything.

      At the most, you can get it converted to a paid-up or single premium status, so that you dont feel the pinch of losing money.

      Thanks again for your visit and feedback. Looking forward to more in future.

  2. wow wow wow wait a minute, you want to say if I bought a wrong policy then I should surrender it now? Are you sure that its not a loss for me in long term?

    I believe only in Maths, and you showed mathematically that its a profit (see I am baniya so I am very facinated by word ‘profit’) if I surrender. So I believe you. You are right if we did mistake it should be rectified not carried along.

    Your article reminds me scene of ‘Lage Raho Munnabhai’, where Munnabhai says he talks in tapori language so his student can understand. ‘Apun ki class mein sab first aate hai second koi aata hi nahi’.
    Your article uses same pattern, language and style that a normal person can understand not just some article with jargons that goes bouncer.

    Keep surving the financiality 😉

    1. Thank you so much for the compliments Sir !!!

      In fact the way you appreciate the article, you can actually start writing articles. I have become a fan of your comments now !!

      Coming to the policy point, yes, it is mathematically also prudent to let go the “Black Sheep” in our portfolio for our own future.

      Thanks again for your visit and feedback. Looking forward to more in future!!

  3. Good article to read and directly relate it with the wrong policy you have bought just by the illusions portrayed by the agent.
    Everyone makes such mistake sooner or later but yes the early its realised, the better it is.

  4. Hi, Thanks for the article. It is indeed helpful, yet i’m still stuck.
    I invested about 30,000 pa in approx. 5 LIC money plus, profit plus,etc. policies about 5 years back. I have paid premiums for 3 years (total – 4.5 Lacs); after which i stopped paying. Can you advice on the best way forward with these policies? How do i minimise my loss?
    Please advice.
    Regards,
    Deepika

  5. I think rather than going for a single premium policy of Rs.75lakhs by paying the whole amount, it would be better if they take a term policy for 75 lakhs and put that whole amount in an FD which fetches around 8% p.a.(amounting to Rs.12000) and take a policy for 1 crore with a premium of 16000(as mentioned in the article) then the same amount of Rs.4000 need to be paid from the pocket and the whole amount of 1.67 lakhs and sum assured will be available for the family in case of eventuality.

    1. Thanks for your insightful comments Sir !!

      Your point is Correct. Whether to go for a single premium term plan or not, will definitely differ from person to person and situation to situation. When we are talking about 8% FD interest, we have also seen era of FDs fetching 5.5% interest (2003-04) and those in 30% tax slab could earn Rs. 6400 for that period, requiring to pay Rs. 10,000 from pocket. And being a developing country, we could see interest rates dropping to even lower levels in future. Also, even if you are not in a position to pay future premiums a particular age, then the cover of Rs. 75 Lakhs is always going to be with you.

      But your point is well taken. Even the strategy suggested by you is pretty workable in many situations. My major focus was, not to continue with a wrong policy, after realising that there is no point in continuing it. Whether to convert it to paid-up or to surrender, will again depend on the person and situation.

      Thanks again for your visit and feedback. Looking forward to more in future !!

  6. nice article Professor. Even i am one of those who feel stuck in those policies…
    I was also missold these LIC policies by my friend who also was not that aware of the issues at that time 🙂
    I did one more math though
    for one of the policies i am paying annual premium of 3977 for 26 years. (jeevan anand)
    so total premia paid would be – 103402
    and i am assuming the bonus accumulation would be aorund 125900 (no one can predict this figure however looking at the latest bonus i just assumed some number)
    so absolute return would be – 121.7577997 %
    and annualize it – > 121.7577997 / 26 = 4.69%
    which would be tax free at that time. which I feel is similar to your debt portion return on portfolio after tax, right?
    so instead of surrendering without really looking at policy’s other features may not be good.
    just make sure, you don’t add any other “debt” portion to your portfolio.

    pardon me if the analysis is totally wrong.
    thanks,
    Onkar

    1. Dear Sir,

      Many thanks for your insightful feedback and analysis.

      Few things I would like to let you know:

      1. As you rightly said, we cant accurately predict a bonus figure. But still the bonus assumed by you looks to be on the higher side. Still, Lets take it to be the accurate for the time being.

      2. If you are happy with a post-tax return of 4.69% on your investments, then this could be the right policy for you. But given the inflation of 6-7%, your money is actually losing its value day-by-day rather than gaining. So you need returns at least higher than the inflation.

      3. Even debt products have the potential to give you 7-7.5% post-tax returns. So we are losing a lot by treating an LIC policy to be a debt portfolio. Good debt products should be included in the portfolio to give it stability. But calling an endowment policy or any other traditional plan to be “debt investment” may not be the best option.

      4. A simple principle of investing is, use debt for short term investments and equity for long term. However, we have investors asking “which stock should I buy with a 1-month horizon” and “which LIC policy should I buy for my retirement”. So we are doing exactly opposite of what we should be doing.

      5. I fully agree that Surrendering should not be blindly done, without evaluating all the options. But many a times, you conclude that surrendering (even after the losses) proves the be the best option in the long run.

      Hope this is helpful. Thanks again for your visit and feedback. Looking forward to more in future !!

  7. Very nice article by Mr.Bajaj. It requires courage to rectify our mistakes. Must read for the people who have large traditional insurance policies in their portfolios.

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