Stuck with a wrong Policy? Get over it!

“Where were you all these days? Why didn’t you come when I was making all these mistakes ?” asked Dr. Rajesh Sharma, a 32 year old surgeon, sitting on a sofa in his drawing room. Mrs. Ragini Sharma, his wife, came rushing out to see, whom is Dr. Sharma talking to ? To her great surprise, Dr. Sharma was talking to the T.V.!! “If you had told me these things earlier, I would not have made such mistakes!!” Dr. Sharma was complaining to the Television.

“Are you all right, Rajesh?” asked Ragini. “Do you know that you are talking to the television?”

“No, I am not all right at all. Every day I am reading and watching views that one should never mix investments and insurance. The advisors on T.V. keep telling that term plan is the best for insurance and SIP is the best for investments. Why didn’t these guys tell me all this 3 years back when I wanted to buy a new policy?” Said the worried Dr. Sharma.

“So what’s the big deal even if they tell it to you now?”asked Ragini.

“I have already bought an endowment policy 3 years back which was a combination of investments and insurance. The agent somehow convinced me to buy this endowment plan which will give me insurance, investments and tax saving. But now I have come to know that he just did this to earn good commissions. This plan is a total waste for me.” Said Dr. Sharma.

“So now that you know, what is really good for us, why don’t you close this plan and start a new plan?” asked Ragini.

“It’s not so simple. If I stop this plan, I will lose out the premium paid so far and also the life cover would cease.” Said Dr. Sharma.

“Well, in that case, let’s work on some numbers.” Said Ragini. “ How much premium are you paying for this endowment plan?”

“Around Rs. 1,00,000 annually. I am getting a life risk cover of Rs. 25 Lakhs and on maturity I will be getting an amount of around Rs. 47-Rs.49 Lakhs after 25 years.”  Said Dr. Sharma. “But the guy on the T.V. says that with an annual income of Rs. 10 Lakhs, I should have a life risk cover of Rs. 1 Crore. Also, with a current expenditure of Rs. 40,000 p.m. , and assuming a long term inflation of 5.5% p.a., I would need a monthly flow of Rs. 1.5 Lakhs to live with the same living standards. This would require a retirement corpus of around Rs. 2-2.25 Crores. This cannot be achieved with the endowment plan I am paying premium for.” Said Dr. Sharma.

“Ok, Coming back to my original question, if you stop this plan today, what will happen?” asked Ragini.

“My Policy will lapse and the life risk cover would stop” said Dr. Sharma.

“And suppose you take a fresh term plan of Rs. 1 Crore, what will be the premium for the same?” asked Ragini.

“Not too sure, but should be in the range of Rs. 15,000-Rs. 16,000 p.a.” said Dr. Sharma.

“Ok and if you invest the balance Rs. 84,000-Rs. 85,000 systematically in mutual funds, what amount could you after 25 years ?”

“Near about Rs. 1.19 Crores.” Said Dr. Sharma.

“Then why do even bother whether your existing policy lapses or not ? Just forget that you had purchased any policy and that you were paying premium for the same. Start afresh and you will find that your goals are achieved without you noticing the loss of existing policy.” Said Ragini.

“Good thought Dear. But what about my existing policy? What should I do with the same?” asked Dr. Sharma.

“We have a couple of options. First option, surrender this policy and obtain the surrender value.” Said Ragini.

“But Surrender value will not be more than 50%-60% of what I have paid so far. I will be incurring a loss. The money which I paid towards the premium is my hard earned money.” Said Dr. Sharma.

“You are right” smiled Ragini. “But you didn’t do that same hardwork while buying a policy. You bought it in a hastened manner. When you make a mistake, there is a penalty associated with it. But should that prevent you from taking a corrective action when you realise it? Just to give you a medical example, suppose you come to know that your doctor is giving you a wrong treatment, would you still continue taking it just because you have already paid the doctor ? The best solution is to get over it, say a good-bye to the wrong doctor and move on to the right treatment.”

“Ok, let us assume that I decide to surrender the plan and book a loss. Now what ?” asked Dr. Sharma.

“This surrender value can be used to buy a single premium term plan. Suppose you get a surrender value of Rs. 1.67 Lakhs from this policy, you may buy a single premium term plan with this amount to get a cover of Rs. 75 Lakhs. And then you can buy a second term plan of Rs. 25 Lakhs which will only require an annual premium of Rs. 4000-Rs.5000 p.a.

This way, we will have an amount of Rs. 96,000 to be invested annually which will give us a retirement amount of Rs. 1.36 Crores.” Said Ragini.

“Wow !! Sounds great !! And what is the other option ?”  asked excited Dr. Sharma.

“Second option is to convert the policy into a paid up policy. This way, the cover would cease, but whatever premium you have paid so far, and the nominal bonus accrued on the same, will be paid to you on maturity. This amount will be so small that it will be meaningless, but for those who think that surrendering entails booking a loss, may go for this option.” Said Ragini.

“That’s great Ragini. So I still have an option to correct my mistake?” asked Dr. Sharma.

“We always have that option Rajesh. It’s just that we need to change the way we look at things. Whenever we realise that may-be we have taken a wrong decision, we start defending our decision than correcting it. Our ego does not allow us to book a loss. And due to this, rather than taking a corrective action, we continue making that mistake and when it becomes big, we only have regrets.” Said Ragini.

“You are absolutely right, Ragini. Even if we have made a mistake, we have an option to get over it. We just need to learn to overcome our ego, keep an open mind and take corrective action on the same.” Said Dr. Sharma.

We look forward to your feedback and comments on the above article. (The views mentioned in the article are personal opinion of the author. The characters used in the article are hypothetical).

The Author Prof. Saurabh Bajaj (BE, MBA, FRM) is Chief Investment Planner with Nidhi Investments, Mumbai. He may be contacted on saurabh@nidhiinvestments.com if you have any questions.