Stuck with too many endowment plans? Expert explains the right approach

Have you recently assessed your financial portfolio and found that your insurance basket is loaded with endowment plans that run for several years? In the past, many parents bought endowment plans in their children's names without fully understanding the returns or benefits these plans offered. In this article, we discuss the best way to deal with these multiple endowment plans.

Before we get to the main topic, let us briefly understand what endowment plans are.

An endowment insurance plan is a life insurance product that combines life cover and savings. These are primarily long-term plans designed to help meet distant financial goals such as education, marriage, and retirement.

Under such a plan, the nominee receives the death benefit if the policyholder dies during the policy term, while the policyholder receives the maturity benefit if he or she survives the policy term.

Now, coming to the main question.

Abhishek Kumar, a SEBI-registered investment adviser (RIA) and founder of SahajMoney, says the right approach is to treat each endowment policy as a separate investment and analyse it individually rather than opting for a blanket surrender.

He adds that the assessment should begin by listing all policies along with their start date, remaining tenure, premium, sum assured (SA), current surrender value or paid-up value, and whether tax conditions such as the Section 80C lock-in period or Section 10(10D) limits on premium to SA are met.

For arriving at a decision on these policies, Kumar advises:

If maturity is far away and the internal rate of return (IRR) from continuing the policy is clearly lower than what could be earned through even conservative alternatives, it may make sense to surrender the policy, subject to tax implications and surrender charges.

However, if maturity is near, it is often better to either continue the policy or convert it into a paid-up policy, under which no further premiums are paid but the policyholder still receives a proportionate maturity benefit at the end of the tenure.

The goal is to stop future premiums, minimise surrender and tax damage, and route savings toward term cover plus other investments, he adds.

Policyholders may also convert some older or near-maturity policies into paid-up policies so that no further premiums are payable while preserving some value.

This allows them to clean up their legacy insurance portfolio while limiting tax implications and sunk-cost losses, and build wealth more efficiently through suitable future investments, Kumar notes.