Life Insurance 321 views March 25, 2020

Life insurance policies are exceptionally beneficial in case of premature deaths when the family loses its breadwinner. They act as a financial cover for an individual.  Having a life insurance policy becomes a financial asset for the policyholder as it provides a benefit either when the insured dies or if the plan matures.

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There are several cases where investors are unhappy with their life insurance policies. This is usually because of multiple external factors. A policy may have been mis-sold to you or may not be apt for the current financial needs. There might be better available options. During times like this, it is always suggested to exit the policy plan rather than paying a premium. When you exit the policy, you get a surrender value which can be invested elsewhere for better benefits. Every policy, however, is not accompanied by a surrendering value. You should, therefore, confirm the surrender value before diving into the policy.

 The surrendering process varies with the policyholder and the nature of the investment. For instance, if policyholder surrenders before the specified maturity date then charges will be implied. Numerous factors like nature of policy, premium pay etc. have a key role in this setting as well.

The following steps can be taken to exit a life insurance policy you are not satisfied with it:

  1. Exiting pure term plans: Term plans are associated with low-cost insurance. They do not provide with any surrender benefit. One needs to make an informed decision as existing the pure term plan would mean losing all the paid premiums as well. The free look feature is the only possible way to exit a pure term plan. 
  2. Exiting endowment and unit-linked plans
  3. As mentioned above, the period of free look is the earliest exit option. This period lasts for about 15 days. Having access to the receipt of the document, one can cancel the policy. You have the liberty of leaving the policy during this grace period in case you are unhappy with the current decision and wish to change it. The premium would be returned by the company after deducting some charges. The deducted charges include several aspects like service charges, medical charges and stamp duty.
  4. If your policy has undergone the completion of 3 years, in case of traditional insurance plans, then insurance companies offer a voluntary policy termination. Remember to not surrender in the first year as there is no refund linked to it. After the completion of the lock-in period, the money invested between first and third year can be surrendered. Following things are bound to happen if one surrenders after the completion of the lock-in period:
  5. With the introduction of the surrender value, you would be presented with a lump sum amount.
  6. Your insurance cover comes to a halt.
  7. The policy would be terminated

In the case of ULIPs, however, the lock-in period is 5 years. You can surrender the policy after 5 years and avail the available fund value.

An alternative to surrender – making the policy paid-up

Paid-up policy is a widely followed concept under the subject matter of life insurance policy. Through paid-up policy, you do not fully exit the policy. You let your policy carry on till maturity without having to pay the premiums. The only drawback being it is at a reduced sum. One can calculate the same with the help of the formula below-

Paid-up value= Original sum assured x (Number of premiums paid)

(Total number of premiums of the policy)

Retaining any bonuses made before the declaration of the policy as a paid-up policy would be allowed. However, future bonuses would not be given. 

So, while under surrender the policy completely comes to an end, in case of paid-up the policy continues at a reduced value.

Making a choice

Life insurance policies are subjective and hold a different experience for everyone. Making a well-informed decision should be a priority. Some policyholders believe in holding onto the policy as it may be more productive. It is always suggested to be ready with an alternative/back up plan if thinking about surrendering a life insurance policy. Financial needs should be the central theme of your policy. Buying or exiting should come secondary.

It is always recommended to make a well-educated decision before jumping into any life insurance policy or exiting the same. Take in different perspectives and understand the points from the standpoint of a policyholder as well as an insurer. Any haphazard decision can lead to destructive results. Choose an appropriate policy fulfilling your basic needs. Understand everything thoroughly and then come to a conclusion.

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