Endowment policy: surrender, make paid-up or keep paying?

The wrong question and the right one

Most people holding a traditional endowment policy ask whether it was a good buy. Often it was not: the bundled cover is thin and the savings part earns little, as our post on term insurance vs endowment sets out. But that question is about money already paid, and nothing you decide now brings it back.

The question that matters is narrower. From today, what return does each remaining choice offer on the money you still control? That is the surrender value you could take now, plus every premium still due. The policy surrender vs mutual fund calculator is built on exactly this, and the answer is often not the one people expect.

Three options, not two

• Continue. Pay every remaining premium and collect the maturity value with its bonuses.
• Make it paid-up. Stop paying but keep the policy. The sum assured is cut in proportion to premiums paid, bonuses already declared stay, future bonuses stop, and the reduced amount arrives at maturity. The premiums you no longer pay can be invested.
• Surrender. Take the surrender value now and close the policy. The cash and the freed premiums can both be invested. Life cover ends.

A worked example

These are illustrative figures, not any insurer's schedule. Your own come from the insurer's quote and the policy's benefit illustration.

Over its full life, 20 premiums of ₹50,000 turning into ₹20.5 lakh is a 6.43% return, measured as an XIRR. That is the number that makes these policies look poor.

Now look forward. Continuing means giving up ₹2.6 lakh today and paying ₹50,000 a year for 13 more years, to receive ₹20.5 lakh. On those cash flows the return is 9.01% a year. Making the policy paid-up means giving up ₹2.6 lakh to receive ₹6.65 lakh in 13 years: 7.49%.

Why does continuing look better than the policy as a whole? Because the heavy early costs, mostly commission and set-up charges, came out of the first seven premiums. They are sunk whichever option you choose. The surrender value is low for the same reason, and the 13 premiums still to come carry far less of that cost. You can check any set of cash flows like these on the XIRR calculator.

Against investing the money instead

Both exits free the ₹50,000 a year. The calculator invests it monthly over the 13 years, and for a surrender it also invests the ₹2.6 lakh lump sum. The outcome depends entirely on the return you assume:

The last row matters because the maturity value here is tax-free (the premium is within 10% of the sum assured), while an equity fund's gains are taxed at 12.5% above ₹1.25 lakh. We have taxed the whole gain in the year of sale, which is the simple case; the capital gains tax calculator handles staggered withdrawals and the guide to mutual fund taxation explains the rules.

Working through the returns in between, surrendering and investing beats continuing only if the money earns more than about 9.8% a year after tax. That is the real hurdle. Over 13 years, an equity fund such as a flexi-cap fund or an index fund has a reasonable chance of clearing it, and no guarantee of doing so. A debt fund or a fixed deposit would not clear it.

Timing changes the answer

Run the same policy eight years later, with 15 premiums paid and 5 left, an assumed surrender quote of ₹9 lakh and a paid-up value of ₹14.25 lakh. Continuing now returns 13.31% on the remaining cash flows, and paid-up returns 9.63%. Late in a policy the case for finishing is strong: the costs are behind you and the final bonus is ahead.

The case for surrendering is strongest in the middle years, when the surrender value has started to reflect what you paid and many premiums remain. In the first two years the surrender value is usually small, and there is a tax cost too: surrendering or making a traditional policy paid-up before two years of premiums reverses the old-regime deductions claimed on them (section 80C under the old Act, now section 123 of the Income-tax Act, 2025). The section 80C calculator shows what that deduction was worth.

Before you sign the surrender form

1. Put a term plan in place first. Surrendering ends the cover, and paid-up shrinks it. Size the new cover with the term insurance calculator, and do not let the old policy lapse until the new one is issued.
2. Get three numbers in writing. The surrender value today, the paid-up value at maturity, and the maturity value on the insurer's current bonus rates. Bonuses are not guaranteed, so ask how the projected figure is calculated.
3. Decide where the money goes before it arrives. A surrender cheque that sits in a savings account earns less than the policy it replaced. Setting up the SIP on the same day keeps the comparison honest; the SIP calculator shows the path.
4. Use the hurdle, not the headline. If you would not invest the freed premium in something likely to beat the policy's forward return, continuing is the better choice. Our guide on why insurance is not an investment covers the broader case for keeping the two separate.

The figures above are an illustration. Policy terms, surrender schedules and bonus rates vary by insurer and product, and past fund returns do not predict future ones. None of this is a recommendation to surrender, continue or buy any policy or fund.