How to get out of a policy you do not want to continue paying?

So a person came to me yesterday and shared a list of 4 insurance policies he had taken 2-3 years back.

1) So the first one was AVIVA New Wealth Builder which he had taken one in his name and one in his wife's name. He has paid 2 years of premium and would like to know if he should continue paying 9lacs and 1lacs as annual premium.

Ans. Part I: What are returns of these policies?

He has to pay the said annual premiums (9lacs & 1lac) for 10 years and in the 21st Year i.e. in the year 2041 he will get 1.98 crores and 22 lacs respectively. The absolute amount looks staggering but the actual annual returns during the entire 20 year period is just 5.16% or lower if you take tax on premium also.

In other words an FD can give you better returns. So Returns wise its a straight 'NO'. I sharing a excel screenshot of the returns calculation for better understanding. IRR function is used.

Ans. Part II - What is the exit strategy?

A) Stop paying premiums anymore:

In this case the premiums you have paid for the last two years 18lacs (9+9) in first policy and 2lacs (1+1) in the second policy will remain with the insurance company. At the end of policy term which is in the year 2041 you will receive 39.64 lacs and 4.40 lacs respectively.

Also you will have reduced insurance coverage during this period of 19.80 lacs and 2.20 lacs. In this case you money will grow at 4.13% per annum for the next 18 years.

Ans. Part II - What is the Exit Strategy?

B) Stop the policy and get back the premiums you have already paid:

For this to happen, you should have at least paid two years of premiums. In this case that has been fulfilled so you can initiate surrender of the policy. But you will not get the entire amount or 100% of the premiums you have paid.

Based on the policy brochure, since you have paid for 2 years and policy term in this case is 20 years you will get 43% of the total premiums you have paid. In other words, from the 18lacs (9+9) and 2lacs (1+1) already paid you will only get 7.74 lacs and 86k respectively which is very low.

Now how do you offset this? The only way is to invest the above amount in any instrument that will give you minimum 10% per annum for the next 18 years. This can be equity mutual funds, index funds or fundamentally good stocks.

Below I am sharing the policy table that shows what % of the total premiums paid you will receive based on year of surrender. This is of AVIVA New Wealth Builder.

More than 70% of life insurance polices are stopped after 2 years of premium payment due to mis-selling by agents/banks . So if you ever feel to stop a policy or have already stopped one, then know how to get your money back also.

DM for help!