Very often we find investors unhappy with their insurance policy. This could be due to various reasons. The policy may have been mis-sold, or there may be changes in the family and the policy may not be as per current financial needs, or the policy just may not be as attractive as it seemed when it was bought. Whatever the reason may be, in such a scenario, instead of paying the premium for a policy that isn’t really suited, it is wiser to exit it and invest the money elsewhere as per needs. Here is how you could come out of a life insurance plan that you may be dis-satisfied with.
Exiting Pure Term Plans
Term plans are a low-cost insurance option without any surrender benefit. If you wish to exit a term plan, think it over, as you would be losing all the premiums that have been paid. If you find the cover to be low, try compensating it with a new plan of higher cover. The earliest and only exit option offered in a term plan is during the free look. If you desire to exit after this free look period, it is best to let the policy lapse.
Exiting Endowment and Unit Linked Plans
The Free Look Period: Mandated by IRDA, the free look period is the earliest exit option offered by insurance companies. This is a grace period of 15 days from the receipt of the policy document, to cancel a policy. So in case u wish to rethink your decision, or are not happy with the policy, you could exit during this period. Your premium amount would be refunded back, after deducting charges towards stamp duty, medical tests and service charges.
Policy Surrender: Insurance companies generally permit a “voluntary policy termination” after completion of 3 policy years. Surrendering the policy in the first year would not get you any amount. If you surrender between the first and third year the money invested could be taken back only after completion of the lock-in period. So what happens when you surrender a policy after the lock-in?
ü Your insurance cover ceases. You would not be covered for any amount once it is surrendered.
ü You would receive a lump sum amount when you surrender, known as the surrender value. Surrender value is calculated on the basis of the number of premiums paid and the total number of premiums of the policy.
ü Surrender value would be paid net of various charges such as annual, surrender and fund management charges. As per IRDA guidelines, policy surrendered after 5 years, does not attract any such charges.
Make your policy Paid up:
Most insurer let you make the insurance policy paid up. In a paid up policy, you don’t completely exit from the policy. Instead, you stop paying your premiums and your let your policy continue till maturity, however at a reduced sum assured. This is known as the paid up value and is calculated as:
Paid-up value = Original sum assured x (Number of premiums paid
Total number of premiums of the policy)
Though the insurance cover continues, you would not be eligible for future bonuses, but you could retain any bonuses that were declared before you made the policy paid up.
Thus in a paid up policy:
ü You continue your life cover but at a reduced amount.
ü You do not receive any lump sum benefit.
Under both the options you would stop your premium payments.
Making a Choice…
When we take the case of ULIPs, where a significant portion of the premium goes towards investments, as the years pass on, greater are the returns that is generated. This is because; insurers generally recover the policy expenses in the initial years itself. So if you are nearing your policy maturity, think and then take the plunge to surrender the policy. It may sometimes be more fruitful to hold on.
If you are surrendering your policy, make sure the alternative investment that you would make is going to help you cover the losses incurred in surrendering the policy. If you do not have any other life insurance cover, it is wise to opt for a paid up policy instead. Whether you are exiting out of a policy or buying a new one, the primary focus should always be on what your financial needs are.