To exit a life insurance policy or not?
Life insurance is invariably sold for reasons other than protection, which is its primary objective and which should be part of every working woman's portfolio. Most often than not, it is pegged as an investment product, even though there are a host of more efficient growth options. So what do you do if you are saddled with a cover that doesn't offer sufficient protection or serve as a growth tool?
Surrender Options |
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| The stage of a policy determines whether you should give it up |
| Early stage: A policy can be surrendered only if it has been in force for three years and the premiums for this period have been paid. |
| Middle stage: At this point, you can either surrender the policy or convert it to a paid-up plan, the latter being a better option. |
| Late stage: If your policy is about to mature in three to five years, it may be prudent to let it run its course. |
While some policyholders realise their mistake and want to exit such a policy, doing so at an early stage can result in a loss. Given that the financial loss can be high, should you surrender the policy? If you start investing in a product that can deliver higher returns, not only can you wipe off your losses, but also earn more than you would with a life endowment plan.
A policyholder is likely to face three scenarios depending on the premiums paid through the three stages — early, middle and final years — of a policy. Many insurance agents push policies that require premium payment only for three years; women should be extremely wary of such agents. This is because if you terminate the policy within three years, you will not get anything from the insurer.
According to insurers, a policy can be surrendered only if it has been in force for three years and the premiums for this period have been paid. Even after three years, for a typical 20-year term, you receive only 25-35% of the premium paid and bonus accrued, if any. What you get depends on the tenure of the policy and the premiums paid. Still, it is a good time to consider exiting and cutting your losses.
If you are mid-way through the policy tenure, you can either surrender it or convert it to a paid-up plan. On exiting, you may get 50% of the premium, a loss-making proposition that is best avoided. Converting it is a better option as the sum assured is suitably lowered to meet the life cover for the paid premiums. You will get the accrued bonus, but only at the end of the original tenure. Finally, if your policy is set to mature in three to five years, it may be prudent to let it run its course because saving this premium will not be too beneficial.
So if you have picked the wrong policy or your risk appetite has increased, restructure your portfolio accordingly.
