Don’t surrender your insurance policy at a loss


If your Ulip was bought before 2010, it would make sense to continue

Ganesh Shankar, 68, was coaxed into buying a unit-linked plan (Ulip) by his relationship manager. The 10-year plan has an annual premium of Rs 1 lakh. When Shankar received the statement in the third year, he realized that the value of the Rs 2 lakh premium he had already paid was down to Rs 92,000. The had a sum assured of a mere Rs 1 lakh. Now he wants to stop paying further and surrender the

Like Shankar, many don’t realize that with higher age, the premium for life cover also increases and eats into the allocated for investment. Only after the first or second year do investors realize their mistake. Making a hasty decision to surrender the may not, however, be in your best interests always. Many reports in the past have shown that when buyers surrender their investment-cum-plans, they only add to insurers’ profits.

Not everyone wants to surrender his due to the erosion of wealth. There are other reasons, too. An individual could be moving out of the country and may prefer to buy an cover in the country of residence. Also, plans vary in nature. There’s no standard answer to the question of whether surrendering a is the best option. Even among Ulips, the answer depends on whether the was bought before or after the laws were overhauled.

Shankar is lucky to have bought his after the regulator overhauled the charges for the category. Just over seven years earlier, insurers paid commissions as high as 90 percent of the first-year premium to agents. Ulips of those days offered a nasty deal to investors, though the high costs charged from them were very profitable for the company and the agent selling the product. Regulatory changes have fortunately turned matters substantially in favor of the investor. Ulips are no longer a bad word and may be considered by an investor who knows what purpose or goal the product will serve in his financial plan.

Ulips bought before 2010

An investor who has stayed with the old for a long time has got over the hump. High charges have already been applied in the initial years. Now, the returns would have improved to be at least at par with fixed deposits. Even if you had bought a that invests all the in equities, in say 2007-08 when the market was close to its peak, you would still be in profits. If you have diligently paid the premiums, you should begin to see the benefits now. Things will get better with time as the charges will be lower going forward. A with all the investments in debt would be giving returns at par with bank fixed deposits by now. If your has a tenure of 10-15 years or more, stay with it. With professional fund management, your returns should get better in the future.

A person who had bought a about a dozen years ago and not contributed to it after three-four years needs to check the terms of the Some old policies require that be paid for at least three years, and others require it to be paid for at least five years. The may have lapsed due to non-payment of premium. If it has not lapsed, the investor should wait until maturity as the investment value is likely to be higher than if he surrendered it now.

Ulips bought after category overhaul

In the past, not many investors were aware that they should keep and investment separate. For them, was among the most preferred avenues for investment. Today a rightly chosen can be a competitive investment, but the investor needs to be able to ensure that his relationship manager has put him ahead of the commissions that the product pays. A bad product is best surrendered.

The revamp in regulations has led to greater clarity about costs for investors who seek it. The disadvantage of a large upfront commission can be covered over the long term with the mortality charges and other costs dropping as a proportion of the annual premium. An investor would recover most of the costs and also pay no surrender cost on a held and kept current by paying the premium for at least five years. Surrendering a before five years, on the other hand, means losing all or most of the premium paid.

The tax benefit under Section 80C on investment in life is available only if the sum assured is at least 10 times the premium paid. On surrender of the before five years, the tax benefit claimed earlier is reversed and tax has to be paid. However, surrender value is tax-free if the is surrendered after five years. The death benefit is tax-free at any time under Section 10 (10D) of the Income Tax Act.

Surrender value

The surrender value of a life depends on the type of and its terms, which vary from one insurer to another. No charge is levied if a has been kept alive and the have been paid regularly for five years.

The surrender value of a traditional plan is calculated by the following formula: (number of premia paid/total number of premia) X sum assured. For example, a 20-year endowment with an annual premium having a sum assured of Rs 10 lakh for which the premium has been paid for 10 years will have a surrender value of Rs 5 lakh ((10/20) X 10,00,000). With early surrender, the investor loses some premium paid and returns.

Term plans have only a death benefit and no surrender value. A Rs  25 lakh term will pay Rs 25 lakh on death. The lapses if the premium is not paid and no money is returned to the policyholder. This is the cheapest for pure risk cover. Sensible individuals should buy a term plan to fulfill their life needs.

To surrender a policy, you have to fill a form and submit it to the insurer. Documents to be submitted for surrender include surrender form, bond or document, a self-attested copy of ID proof, a canceled cheque or a bank attested account statement or a bank-attested copy of the passbook.

When to exit

  • If you have completed eight years or more in a traditional plan
  • If you have completed the mandatory lock-in of five years in new Ulips
  • If the sum assured is not 10 times the premium

The writer is CEO, Right Horizons

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