In continuation with the case in the previous article, Ajit is now 35 years old, married with a small kid. His expenses, responsibilities and insurance and savings needs have all increased. Now, he is stuck with an endowment policy on which he has to pay regularly for the next 10 years, but which neither gives him the required insurance cover nor the required growth on investment. Ajit now knows the benefits of taking a pure term insurance and wants to take one for 25 lakhs for a term of 20 years which would cost him around Rs 10,000/- pa, but he doesn’t want to incur this expense in addition to the endowment policy premium.

Is there a way out for him? Yes, there is.

Most endowment policies become paid up after 3 or 5 years of premium payment. Since Ajit has already paid for 10 years, he has an option of stopping paying further premiums and making the policy paid up. This would of course reduce his sum assured or insurance cover proportionately to around 2.5 lakhs. But that will not affect him as he anyway plans to take a fresh term cover. The accumulated bonus of approx Rs 2.5 lakhs (assuming 5 % bonus) and the bonus for the next 10 years calculated on the new sum assured of Rs 2.5 lakhs, i.e Rs 1.25 lakhs would be paid on maturity.

This mean that now Ajit would get Rs. 6.25 lakhs on maturity (2.5 Lakhs sum assured + 2.5 lakhs accrued bonus + 1.25 lakhs expected bonus). This is Rs. 3.75 lakhs less than the Rs 10 lakhs he would have got had he continued to pay the premiums till maturity. Consider this- If the Rs. 25,000/- which he would have paid for the next 10 years is invested in the simple PPF a/c annually @ 8 %, it would accrue to Rs. 3.92 lacs after 10 years!. So he wouldn’t lose out on anything by stopping the premium payments.

Hence it surely makes sense for Ajit to exit this endowment policy and use that premium amount for the required term cover and save the differential amount for the future.