All of us have an insurance policy. In fact, some of us have many. But how many of us have bought these policies for the right reasons than wrong. Most of us must have accumulated policies towards the end of last quarter just to avail tax benefits. We must understand that insurance is a risk mitigation tool and is different from investment. But continuing unwanted policies and paying huge premiums towards them we block the funds that can help us achieve our other financial goals in life.In order to free up your funds it’s essential to identify if the policy you have in our portfolio meets your objective. This can be done by doing some criteria check.
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How much Insurance do I need?
First of all, you need a cover of at least five to six times your annual income according to a rule of thumb. Also, the premium for this cover should not account for more than 6-8% of your annual income. Another criterion to be looked into is the tenure of the policy. Insurance is meant to replace the income of the policyholder. If it doesn’t cover you for your entire working life and gets matured before you retire, it makes no sense. Return is another part that must be taken into account. Mostly traditional policies like endowment and money back are projected attractive on expected returns on maturity. But the bitter truth is that the returns generated by them are no more than 5-6%. It is better to have a term insurance plan and keep the investment component separate.
Let’s see the various ways in which you can close your policy if you find your policy to be unsuitable
Let the policy lapse
If the policy is not all suitable, you can let it lapse. This is done by simply not paying the premium further. This works in case of policies which have not completed three years. The premium paid in the first two years is forfeited and the policy ends. You need to remember that along with this you also lose the tax benefits availed of in the first two years on the premium payment. All you get is the freedom from the policy. The case is different for Ulips, though. Here even if you discontinue the policy after a year, you are entitled to some amount after deduction of surrender and mortality charges. But its gets locked and comes to you after 5 year period. Your money keeps earning 3.5% interest per annum, though till then.
Surrender the policy
In case your policy has completed three years, the insurance policy accumulates a surrender value. This is on account of the premiums you have paid. So you can get some money back. However, it will be a percentage of what you have paid over three years. These are called surrender charges.In the third year, the surrender value is approximately 30% of the total premium paid, but this goes down as the number of years with the policy increases
In case of Ulips there is capping on the surrender charges. This is 3,000 or 20% of the annual premium in the first year. This comes down to zero till the fifth year.However, you must note down that by surrendering a policy, you also end the life cover. Keep yourself insured before you cancel any old policy. Since you have grown a little old, the premium for the new policy might be tad expensive.
Apart from lapsing and surrendering the policy, another alternative is to convert your policy into paid up. This is done by just stop paying the premiums, but choosing the option not to discontinue the policy along with it. Another point to be noted that you can use this policy only after three years as you do in case of surrendering the policy. This lets you have a life cover out of the corpus built by your policy. The cover is reduced though. It is proportionate to the number of years for which the policy was in force. For instance, if a policy offers a life cover of 10 lakh for 20 years and the policyholder converts it into a paid-up plan after five years, the life cover will be reduced to about 2.5 lakh. On maturity of the plan, you will get the reduced corpus and the accumulated bonus.
Under paid up option, you get the freedom from paying premiums as well remain covered too. This is indeed best of both worlds. You can put reinvest the premium money towards achieving any other financial objective of yours.
Let it continue
If your policy is close to maturity, it makes no sense to surrender it or convert the same into paid up as you have already been through the painful period of high charges. So pay the remaining premiums and complete the full term so as to avail of the accumulated corpus at the time of maturity.