'Most LIC policies offer poor...': Financial advisor breaks down traditional plans, suggests smarter moves

Aditya Shah, Founder of Hercules Advisors-Stocks, has shared insights on what households should consider when dealing with their traditional life insurance policies from LIC and other insurers. In a post on X (formerly Twitter), Shah highlighted that many continue with such policies without fully understanding their structure, benefits, or limitations.

Shah explained that life insurance is primarily meant to provide financial security to a family in case of the insured’s death, with some policies also offering maturity benefits. Traditional products often blend insurance with investment features such as unit-linked insurance plans (ULIPs), non-linked participating, and non-participating plans.

According to him, most buyers expect assured returns, often guided by agents who earn higher commissions on these policies. The trade-off, however, is that traditional plans typically offer very limited life cover compared to term plans, which provide far greater protection at a lower cost.

For policyholders stuck in this dilemma, Shah outlined two possible approaches:

1. Surrender the policy: Terminate it and receive a portion of premiums paid (excluding the first-year premium). The payout rises with the number of years premiums are paid, but surrendering early leads to a lower return.
2. Make the policy paid up: Stop paying premiums while keeping the policy active. Available after at least three years of payment, this reduces the maturity benefit in line with premiums paid, creating a “paid-up value.”

On when to choose which, Shah advised that surrendering works best when the policy has several years left or when funds are urgently needed to redirect into better investments. Making a policy paid up suits those unwilling to continue premiums but who do not need immediate liquidity, especially when the policy is close to maturity.

“Traditional policies are often misunderstood. It’s important to assess whether they truly serve your financial goals, or if alternatives like term plans and investments can deliver better value,” Shah said.