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Monday, April 14, 2014

Stuck with a wrong life insurance policy? Options for you..

It is not uncommon to get into buying a life insurance policy which we should never have bought. In India, because of the lack of financial education at an early age, we tend to mix insurance with investments. We all have done that mistake at some point of our financial decision making. But, having bought the policy and paid a few premiums, what are the possible options with us? Should we let the policy lapse? Should we surrender? Read on..

Depending upon how many premiums we have already paid, there are some intelligent options always available with us to streamline our insurance risk cover as well as our investments. Let us get going:

Option 0 : Return your policy during the grace period
If you have just signed up for an insurance policy and you think you have been oversold, you have a 30 day grace period to return your policy. Your initial premium will be paid back to you. Go for this, if you have signed up for such a policy in the last 1 month. This is the most cost effective mechanism.

Option 1 : Let the policy lapse
This is the easiest way to get rid of the policy. Stop paying the premiums and let the policy lapse. Under the new ULIP norms, if you have a ULIP policy, and you stop paying the premiums after 1 year of policy purchase, all your funds would be placed in a discontinuance fund, and paid back to you at the end of the policy term with a guaranteed 4% return.
I would recommend to take this step if you have entered into a wrong policy, and have paid the premiums for 1 year or more but less than 3 years. There are better options available if more than 3 years premiums have been paid.

Option 2 : Surrender your policy
If you have paid 3 years+ of premium, you have the option of surrendering your policy. The surrender value that will be paid back to you would depends on the number of years that you have paid the premiums.
A minimum of 30% of your total premiums paid by you will be offered to you as the surrender value after 3 years of policy being in force.
After the 4th year, the minimum surrender value would be 50% of all the premiums paid.
This can go up to 90% of the premiums paid in the final few years of the policy.
To know the exact surrender value, you will need to connect with your insurance provider and understand the exact calculation before taking a decision. 
I would recommend to take this decision if you have entered into a wrong policy, and have paid the premiums for 3 years+ and are in urgent need of money. There are better options available if you are not in urgent need of money.

Option 3 : Convert your policy to paid up policy
One of the better options to surrendering your policy, in case you are not in urgent need of money, is to convert your policy into a "paid up policy".
This requires a minimum 3 years of policy being in force. The major benefit is that you do not lose the risk cover in this case, although you stop paying the premiums.
However, the insurance company will pare the life cover to an amount which is in accordance with the premium paid till now and assuming you are not going to pay any further premiums.
Though the risk cover is reduced, you still get some cover and continue with the policy, ultimately also getting policy maturity benefits at the maturity, which you would have missed had you surrendered the policy. 
I would suggest to go for this option if you still have a long way to go for policy maturity (more than 5-6 years to go), and do not need the money for urgent purpose.

Option 4 : Continue with it.
It is best to continue with your life insurance policy if it is just 2-3 years away from maturity. Surrendering at this stage (when only 2-3 years are left) means you would lose various maturity benefits and bonus announced by the insurance companies at the time of maturity of the policy.

The right understanding can save money for you from getting locked in avenues which do not give you enough returns. Money invested well is money earned. All the best.

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Manoj Arora
Freedom can buy you what money cannot !!

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