The question is one of the most asked questions in India nowadays. As the equity markets – Sensex marches past 15,000 levels, most of us want a serving of the cake. The euphoria makes even the most disinterested people to make a note of the rising markets. But the 500-points fall showed the investors the glimpse of the other side of the coin.
There are few who have been investing in equities for a long time. However, there are many who have recently started following the equity cult. Though we come across people talking about the markets being driven by excess liquidity, hardly anyone of us has excess liquidity – read ample money to invest. This prompts many to find ways and means to ?fund? their investments. Some try increasing their income and some try to increase the allocation to high-performance assets within their income. Come what may, we are keen on being in the high performing asset classes. The boom in the real estate market makes many consider buying a flat, either through accumulated savings or by opting for a home loan.
The equity markets have been delivering well, and many are trying to axe down their older investments to invest in equities. A significant number of people have bought traditional savings product from various insurance companies with a commitment to pay premium for a long time period like 20 years or more. These guys are now considering how to get rid of this ?low rewarding? commitment and get into something that puts them on the fast track.
Now, this problem takes the buyer of the traditional saving-oriented insurance products, to an inevitable question- what do I do with my life insurance policy? Answering this question is not an easy task.
Before we get down to finding an answer to this question, let us put certain things in perspective. Do I really need to be in ?equities?? Is it in line with my ideal asset allocation? It has been observed that financial goals matter the most, over anything else.
Always remember the adage: investment is all about doing rational acts and not what is fashionable. If the traditional products are reaching your financial goals, you need not go for the equity intensive or so called ?high returns providing? investments. If you really think that traditional products cannot attain your financial goals, then you may consider getting out of it.
Before we surrender the policy, we should consider its implications, another fact that we cannot afford to ignore. Insurance is a cost item and not a revenue item. It is the cost that we pay to save ourselves from the uncertainties of life. So before you consider surrendering your policy ensure that you have adequate amount of insurance.
Sometimes, you may consider buying a pure term plan and surrender an old saving oriented product. But a word of caution, first buy a term plan. There are cases that people turn ?uninsurable? as they age. Also, mind you, the cost of buying life insurance goes up, as you grow old. Hence ensure that your exit from a saving-oriented product is not pushing you into an even worse situation of buying something terribly costly insurance or living an uninsured life.
If you know that you have enough amount of insurance and there is a need to really consider surrendering the policy, here are some guidelines.
The policy acquires surrender value only if it has run a particular number of years. In India, insurers insist that the policy should be in force for at least three years. This ensures that surrendering the policy will fetch you something, be it miniscule. You should note that in case of surrenders there is no possibility of gain as such.
In case of surrenders in early years of the policy you can take the route if you are confident of generating around 10% return post tax on your investments made out of the future premiums that you otherwise would have paid. This rate of return ensures that you will recover your losses in terms of lost premiums and gain as much had you continued with the life insurance policy.
If you are halfway through your policy term there are two options you have. One is you take the surrender value and invest the surrender value along with future premium in some assets that will fetch you a return of around 15% post tax to ensure that you will break even on the policy, as described above.
Simultaneously, you may go the second way. Paid up policy is another option you have at this stage. Here you stop paying premiums anymore. The sum assured accordingly stands reduced in the same ratio of the number of premiums paid to total number of premiums payable. Here the policy does not participate in the future bonuses and you end up getting maturity proceeds at the time of end of original term.
If you are midway through your policy it makes more sense to go for the paid up policy option as the rate of return you need to generate is, somewhere between 12-14%, at least surely below 15%.
If you are in the last leg of the policy term, there is hardly any point to go for surrender or paid up option. It makes more sense to continue paying the premiums and enjoy full benefits of the policy. The above discussion is just to give you a broad hint that may help you reach your answer. There are umpteen permutations and combinations of policy terms, premium paying terms, benefits and other variables. Hence, precise directions are possible only when one goes on a case-by-case basis.
Also, note that the returns discussed here are not difficult to generate, provided you have a long-term view and appetite for risk. Lastly, what matters is movement- be it walking or running, you will surely progress on your way to achieving financial goals.
