I have traditional insurance - Should I pledge it for a loan?

Ans: Taking loan for investment can never be justified under any circumstances.

It is better to swallow one time loss out of surrender of traditional policy and invest the balance surrender value in MFs for capital appreciation.

Your loss may be more then covered by the gains accruing out of mutual fund investments over a period of time.

*Investments in mutual funds are subject to market risks. Please read all scheme related documents carefully before investing.

Happy Investing!!

Ans: Sir, from the details shared, it's clear that you have a well-thought-out approach for managing your LIC policies and potential loans. You have multiple traditional LIC policies maturing over the next five years, each with a sum assured of Rs 1 lakh, along with bonuses and loyalty additions. You plan to pledge these policies for a loan of Rs 5 lakhs, which will be repaid with the maturity benefits over five years.

As a disciplined bachelor with no financial or family commitments, your intention is not to create a legacy but to use this capital for your future income needs through SWP (Systematic Withdrawal Plan). This reflects careful planning, and I appreciate your disciplined approach towards managing your finances at this stage of life.

Let’s break this plan down step by step and provide insights on its feasibility and alternative options.

Key Considerations for Taking a Loan on LIC Policies
Loan Interest Rate: You are planning to take a loan at 10% per annum with no EMI commitment and interest payable half-yearly. This means that your interest will keep accumulating, and you'll need to ensure the maturity benefits are enough to cover the outstanding loan and interest.

Interest Payment: The key here is that interest needs to be paid regularly. Not paying interest would result in compounding, which could lead to a higher loan burden over time. Even though you plan to pay off the loan using the maturity proceeds, it's important to evaluate if the total maturity value will be enough to repay the full loan amount and accumulated interest.

Reduced Death Benefit: As you rightly noted, in case of any unforeseen events, the death benefit for your nominee would reduce because of the outstanding loan. Since you do not have family commitments, this might not be a major concern, but it's still something to keep in mind.

Avoiding Locking Capital: By availing the loan now, you are trying to avoid locking your capital for five years and aiming to earn higher returns in mutual funds during this period. This strategy could potentially yield better returns than the interest cost, provided you invest in suitable equity funds with a higher growth potential.

Let’s now move on to the part about using this Rs 5 lakh effectively over the next five years.

Investment in Aggressive Equity Mutual Funds
Since you are not looking for immediate liquidity and are comfortable with market risks, equity mutual funds are a good option for long-term growth. The key to growing your capital aggressively is selecting funds that have a proven track record in terms of consistent performance and strong fund management.

Here’s how investing in aggressive equity mutual funds can benefit you:

Potential for Higher Returns: Over a five-year period, equity mutual funds tend to outperform other investment avenues. Funds that focus on small caps, mid caps, and sectors with high growth potential can give better returns compared to traditional investments like FDs or bonds.

Diversification: Aggressive equity funds typically invest in high-growth companies across various sectors, offering you the potential for better returns while spreading your risk.

Power of Compounding: By investing this Rs 5 lakh in equity mutual funds, you can benefit from the power of compounding, especially if you stay invested for the full five years without withdrawing. The longer you remain invested, the better your chances of achieving your target returns.

Market Volatility: While aggressive equity funds can offer high returns, they are also subject to market fluctuations. This is why it is important to choose funds that have performed well even in volatile market conditions. You should be prepared for some short-term volatility and focus on the long-term growth potential.

Now, let's evaluate whether taking this loan and investing it in aggressive equity funds is a prudent decision.

Loan vs. Investment Returns: A Practical Assessment
Interest vs. Potential Returns: The key factor here is whether the returns from your investment in aggressive equity funds will outpace the interest you are paying on the loan. While the loan is at 10%, equity mutual funds have historically provided returns in the range of 12-15% or even higher over the long term.

Risk Management: While equity mutual funds have the potential to offer higher returns, there is always the risk of capital loss due to market volatility. You must be comfortable with this risk, especially since you are planning to use these funds for a SWP after five years.

Time Horizon: Your time horizon of five years is relatively short for aggressive equity funds, but it’s still long enough to potentially see good returns, provided you stay invested and the market performs well. If you were planning for a longer horizon, such as 7-10 years, the risk would decrease further.

SWP Setup After Five Years: Your plan to set up a SWP after five years is a smart way to create a regular income stream. By the sixth year, you can start withdrawing from the accumulated capital, using it to support your monthly expenses.

Potential Risks and How to Mitigate Them
Market Fluctuations: Equity investments can be volatile in the short to medium term. If the markets face a downturn at the time of withdrawal, it could affect your SWP income. To mitigate this, you could gradually move a portion of your equity investments into safer instruments (like debt funds) as you approach the fifth year.

Interest Payment Discipline: Even though there is no EMI commitment, the loan’s interest needs to be paid regularly. Skipping these payments can cause the loan to balloon due to compounded interest. Ensure you have a mechanism to pay this interest either from your savings or from other sources.

Liquidity Needs: Since you are investing for five years, ensure you don’t need to access this money before then. Equity investments should not be liquidated prematurely, especially during a market correction.

Alternatives to Taking a Loan
Before finalising this decision, consider alternatives to taking a loan. Since you don’t require this Rs 5 lakhs for immediate use, you might want to avoid paying interest altogether by simply waiting for the policies to mature over the next five years.

Direct Investment from Savings: Instead of taking a loan and paying interest, you could consider investing smaller amounts from your savings into aggressive mutual funds over the next five years. This would reduce the burden of paying interest while still allowing you to benefit from market growth.

Partial Investment: Another option is to take a smaller loan amount (perhaps Rs 2-3 lakhs) and invest it in equity mutual funds. This way, you reduce your interest payment while still benefiting from potential capital appreciation.

Ideal Equity Mutual Fund Selection Criteria
When selecting equity mutual funds, focus on funds that meet the following criteria:

Consistent Track Record: Look for funds that have consistently performed well over the last 5-7 years, even during market downturns.

Experienced Fund Managers: Funds managed by seasoned professionals tend to navigate market volatility better, giving you a sense of security.

Sectoral Allocation: Check whether the fund invests in high-growth sectors such as technology, healthcare, and consumer goods, which are likely to perform well over the next few years.

Expense Ratio: Choose funds with a reasonable expense ratio. High expense ratios can eat into your returns over time.

Final Insights
In conclusion, taking a loan on your LIC policies and investing it in aggressive equity mutual funds could be a good strategy for capital appreciation over the next five years. However, it comes with its risks, especially the interest burden and market volatility.

By investing in carefully selected equity mutual funds, you can potentially earn higher returns that outpace the loan interest. However, ensure that you are comfortable with the market risks and the discipline of interest payments.

If you prefer to avoid the interest cost altogether, consider alternative strategies such as investing smaller amounts regularly from your savings. This could give you peace of mind while still allowing you to benefit from market growth.

In either case, equity mutual funds can be a powerful tool for growing your wealth, provided you invest with a long-term view and in line with your risk tolerance.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
Instagram: https://www.instagram.com/holistic_investment_planners/

Ans: Hello;

First you must ensure that you both have adequate term life insurance cover.

Taking loan for investment is not recommended under any circumstances.

Better option is to surrender these extremely low return endowment policies, after ensuring adequate term life cover, and invest the proceeds in mutual funds.

Returns from mutual funds cannot be assured however based on past record it is observed that generally equity mutual funds provide good inflation adjusted returns over long term.

Happy Investing;

Ans: Your intention to optimise returns while preserving your LIC policy is thoughtful. Let’s analyse your proposed approach comprehensively.

Challenges with Continuing the Policy
Low Returns: LIC Jeevan Anand traditionally delivers returns between 4%-6%. This does not match inflation-adjusted returns needed for long-term growth.

Opportunity Cost: Continuing the policy locks capital in a low-performing investment, missing higher returns elsewhere.

Surrendering the Policy
Immediate Loss: Surrendering early often results in a financial loss due to penalties and lower surrender value.

Lost Insurance Cover: Surrendering ends your life insurance, which might impact your family's financial safety.

Loan Against the Policy
Taking a loan against the policy can be a balanced approach. Let’s break it down:

Advantages of Policy Loan
Preserves Policy Benefits: The policy remains active, and you avoid surrendering it.

Low-Interest Rate: Policy loans have lower rates (around 9.5%-10%) compared to personal loans or unsecured loans.

Flexible Repayment: You can repay on your terms. If unpaid, it adjusts against the maturity or surrender value.

Access to Capital: You can reinvest the loan amount in higher-return investments, offsetting the policy’s poor performance.

Challenges with Policy Loan
Interest Burden: The interest rate of 9.5%-10% is higher than some secured investment returns, especially if the market underperforms.

Risk of Non-Repayment: Unpaid loans reduce the maturity or surrender value. This might impact the total financial benefit.

Investment Discipline Needed: Returns depend on reinvesting prudently. Poor decisions or market volatility can lead to losses.

Investment Options for Loan Amount
If you proceed with this plan, careful reinvestment is essential.

Equity Mutual Funds for Growth
Allocate a majority to actively managed equity mutual funds. These outperform inflation and generate higher long-term returns.

Avoid index funds. Actively managed funds provide better protection during market downturns.

Balanced Portfolio
Allocate 70%-80% to equity mutual funds (large-cap, mid-cap, and small-cap).

Invest 20%-30% in debt mutual funds or hybrid funds for stability.

Focus on Your Goals
Align investments with specific financial goals like retirement, children’s education, or wealth creation.
Steps for Implementation
Assess the Loan Amount Needed: Borrow only what you plan to invest. Avoid over-leveraging.

Consult a Certified Financial Planner: They will guide investment choices based on your risk tolerance and goals.

Track Performance: Regularly review the performance of your investments and adjust when needed.

Plan Loan Repayment: Even if repayment is flexible, try to clear the loan systematically to reduce the interest burden.

Final Insights
Your idea of leveraging a loan against LIC Jeevan Anand is a middle ground. It allows you to continue the policy while investing for better returns. However, it requires financial discipline, monitoring, and strategic reinvestment.

Consult with a Certified Financial Planner to design a customised plan aligned with your long-term financial goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

Ans: You have clearly outlined your concern. Evaluating whether to surrender your LIC Jeevan Anand Plan 815 is a valid question, especially in a debt crisis. Let's assess this from a 360-degree financial planning perspective.

Policy Summary and Present Status
Policy Name: LIC Jeevan Anand (Plan 815)

Sum Assured: Rs. 8 lakhs

Annual Premium: Rs. 36,000

Policy Start Year: 2015

Maturity Year: 2040

Premiums Paid: 10 years completed

Premiums Remaining: 15 more years to go

You have paid Rs. 3.6 lakhs till date (Rs. 36,000 × 10 years)

Surrender Value Possibility at This Stage
After 10 years, policy acquires good surrender value.

You are eligible for a Guaranteed Surrender Value plus bonus value.

Usually, you can get 30% to 50% of total premiums paid.

That means, you may receive around Rs. 1.2 lakhs to Rs. 1.8 lakhs.

Bonus accumulated may add another Rs. 20,000 to Rs. 50,000

So, expected surrender value = Rs. 1.5 lakhs to Rs. 2.3 lakhs.

You must confirm exact amount from the LIC branch or online portal.

LIC agents may not give accurate surrender value details. Go to branch directly.

Is Surrendering Beneficial During Debt Pressure?
You are currently under heavy debt of Rs. 30 lakhs.

Every rupee counts in managing your debt pressure.

Rs. 2 lakhs recovery from this LIC policy can ease your situation slightly.

Also, you will stop paying Rs. 36,000 annually going forward.

That means extra Rs. 3,000 every month saved.

This saving can be used to clear smaller EMIs.

Stopping premium outflow will ease your monthly budget.

Also, LIC policies give very low returns – around 4% to 5% per year.

That’s not good enough when your loans are charging 18% or more interest.

Holding this policy makes no sense when you are paying 2x or 3x in interest.

Insurance and Investment Are Different
LIC Jeevan Anand is an investment cum insurance plan.

Such plans offer low insurance cover and low returns.

You must separate insurance and investment always.

Buy term insurance only for pure life cover.

Invest separately in instruments with better returns.

Do not mix the two goals. It creates confusion and underperformance.

Once Debts Are Cleared – Start Fresh Investment
When your loan burden is reduced, start SIPs in mutual funds.

But don’t choose direct funds on your own. They look cheaper but are risky.

Direct plans don’t guide you when market falls.

Regular plans via MFD with CFP support are more reliable.

Professional help matters more than 0.5% savings in cost.

Actively managed funds give consistent performance over time.

Index funds don’t adapt to market changes. They lack flexibility.

Actively managed funds are better in Indian markets due to volatility.

Invest in regular mutual funds through a Certified Financial Planner.

What If You Don’t Surrender the Policy?
You’ll continue paying Rs. 36,000 every year for 15 more years.

Total outflow will be Rs. 5.4 lakhs more in future.

On maturity in 2040, expected return will be around Rs. 12 to 14 lakhs.

That gives you less than 5% return yearly.

Against that, your credit cards or personal loans are eating 18% to 36%.

You are borrowing at 36% and investing at 5%. It is a huge mismatch.

It is not wise to keep such a policy when under high debt pressure.

Also, keeping it does not help in your credit score recovery.

It only blocks your cash flow for the next 15 years.

If You Are Emotionally Attached to the Policy
Some people feel emotional about LIC policies.

They may feel security or trust due to LIC brand.

But emotional decisions don’t work well in money matters.

Make decision based on logic, not emotions.

You can always restart investment later with better options.

But your debt needs urgent solution today.

Steps to Surrender the Policy
Visit the LIC branch where the policy was issued.

Carry original bond, ID proof, cancelled cheque, and surrender request form.

Request surrender value statement. Ask for exact amount.

Submit the request in writing and get acknowledgement.

You will get amount by NEFT in 7–10 working days.

Once received, use it immediately to reduce your highest-interest loan.

What to Do with the Surrender Proceeds
Don’t spend the amount. Use it only for loan repayment.

Target the most painful loan first – credit card or loan app.

Next, use the freed-up monthly Rs. 3,000 for loan EMIs.

Recalculate your EMI burden after that.

This will reduce your stress and improve CIBIL score.

Don’t reinvest this money now.

Focus only on debt elimination till your income becomes stable.

Final Insights
Your decision to question this policy is smart.

Most people don’t review old policies. You have taken a right step.

Surrendering this LIC policy now is a wise choice.

It gives cash today and saves money in future.

It helps you reduce debt faster and gain control over money.

Once your situation improves, you can start better investments.

Don’t feel guilty for surrendering. It is a practical step, not failure.

Financial planning is about making right choices at right time.

And this is the right time for that decision.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment