Should I surrender my Endowment Policy & buy a term plan?



Dear Fpguru,

I have not taken any term policy till date. Currently I have taken a LIC's endowment plan 6 years back, with 20 year tenor and have being paying Rs.25K as premium for a life cover of Rs. 5 lacs


I am planning to close this insurance plan and buy a pure term plan (1 crore cover).

Please suggest me whether it make sense to close my existing endowment plan prematurely.






Dear Mr. Girish,

We thank you for visiting our website & asking us a question. You have asked us a question whether you should surrender your current policy to buy a new one.

To be honest to you, we cannot advice you on which policy to take or surrender unless we know your insurance needs. When we say insurance needs we mean how much life insurance is actually required for you. If you have financial dependents you require life insurance & as a basic thumb rule this can be taken as 10 times your income. A better way of calculating your insurance needs would be to consult a financial planner.

Assuming your income is Rs. 10 lacs per annum and applying the basic thumb rule of 10 times income, you will require Rs. 1 cr as life insurance. You may calculate the amount required by you in the similar manner. If the amount of life insurance required say comes to Rs. 1 cr you need to take adequate coverage. A term plan is no doubt the best way to get the cover.

The next question is whether you should surrender your current endowment policy or not. Surrendering an active policy is not a simple thing to decide. A lot of things are to be kept in mind for the same. Ideally you should buy an insurance plan for risk coverage so obviously the first thing to keep in mind is the coverage offered in this policy. In your case the coverage is very low i.e. Rs. 5 lacs. The second thing to keep in mind is that as this is an investment cum insurance product, how are the investment returns of this policy? If the same is above inflation you may continue it as a debt investment in your overall asset allocation and if it is below the inflation rate it is advisable to surrender.

The third thing to keep in mind is the tenure left. If you had already paid 15 years premium of a 20 years plan it makes sense to continue the policy. If more than half the tenure is completed it is better to stick to the policy. In your case however only 6 years is paid out of 20 years, so if the returns are poor you may think of surrendering. Lastly you need to see whether the premiums are fitting into your cash budget easily or not. If you are paying high premiums at the cost of other savings in better products then its better you stop paying the premiums.

If the above points are kept in mind and then the decision of continuing, surrendering or leaving policy as paid up is taken then the decision would be a fruitful decision. Otherwise it would an unnecessary waste. Also henceforth do buy a term life plan for your future insurance needs. It is the best way to get optimum risk cover!

Hope this solves your query!


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