METHODS FOR DISCONTINUATION OF LIFE INSURANCE POLICY
· All life insurance policies serve some purpose or the other.
· Term plans protect your family in the unfortunate event of your demise, by taking care of your liabilities and future goals.
· Money-back policies give out periodic payments during your lifetime.
· Endowment plans help build a retirement corpus.
· Ulips help create wealth through equity investments.
· Discarding such insurance policies may not be an easy task, and you should evaluate various parameters for your decision.
1. LET THE POLICY LAPSE
· The easiest way of getting rid of an unsuitable insurance plan is to stop paying the premium, by which the policy lapses automatically.
· However, it is also the costliest method if the policy has not completed 3 years, as the premium paid in the first 2 years is forfeited
· You also stand to lose the tax benefits availed of in the first 2 years on the premium payment.
· This should be the preferred option if you had bought the insurance policy just a year ago, as it is better to get freedom from it to avoid compounding your error in judgement.
2. SURRENDER THE POLICY
· If 3 years’ premium has been paid, you can surrender the plan and get some of the money back as your insurance policy would have built a corpus value (except term plans).
· Some Ulips can be surrendered after 1 year but the surrender value is payable only after 3 years, as investments in Ulips are locked-in for this period.
· Single premium policies can be surrendered after 1 year.
· If you surrender a policy, a portion of the premium that has been paid will be refunded to you (except term plans), depending on the time it was in force and its related surrender charges.
· Insurance companies certify the amount of surrender value, which is also known as ‘cash value’ or ‘policyholder’s equity’.
· Surrender value is the amount an insurance firm pays a policy holder if he opts for voluntary termination before the policy’s maturity or occurrence of the insured event.
· It is that part of the premium amount which goes into an investment account and earns a return.
· Surrender values are available in investment-cum-insurance policies, such as endowment plans, money-back plans and Ulips, since they originate from the investment component.
· The surrender value of a policy is its paid up value and is calculated as follows:
1. Total amount received for investment in the policy
2. Direct costs incurred like agent’s commission and administrative costs
3. Amount actually invested = 1-2
4. Earning on investment
5. Total corpus available = 3+4
· The charges are very high in the initial years for all plans, so the surrender value is low.
· Surrendering a policy also ends the life cover as it effects a termination of the contract.
· If you terminate an insurance plan prematurely, the tax benefits availed of on the premium paid till then is also reversed.
· Policy holders can take a loan on insurance policy against the surrender value.
· Surrendering a policy is not recommended, especially in early years, since the cash value of the policy may not have grown in value in a limited time, and, therefore, may be in the negative.
3. CONVERT POLICY INTO A PAID-UP PLAN
· A better alternative to surrendering your insurance policy and losing the life cover is to convert it into a paid-up policy (except term plans).
· As in the case of surrendering, this is possible only if 3 years’ premium has been paid.
· Instead of returning the money to the policyholder, the insurer uses it to continue the life cover of the plan, by deducting the mortality charges from the corpus every year, for a proportionately reduced life cover over the rest of the term.
· While you will not have to pay any more premiums, the balance corpus will be received only on the maturity of the policy.
· This can imply an opportunity cost since the funds will remain blocked and will earn low returns, instead of being deployed in a better investment product.
· However, this is by far the best way to exit an insurance plan because it frees the policyholder from the premium burden but he continues to enjoy life cover.
4. CONTINUE WITH THE POLICY
· If the policy (except term plan) is just 2-3 years away from maturity, it is best to continue to pay the premium for the full term.
· This is because the painful period of high charges in the initial years has already gone and it doesn’t make sense to let go of the accumulated benefits at the fag end of the term.
· If you surrender it at this stage, you lose the life cover and several maturity benefits, depending on the plan.
· Also, turning a policy into a paid-up plan at this late stage will not be of much use.
· If you find it difficult to pay the premium for these few balance years, it is advisable to withdraw from your retirement fund or even take a short-term loan.