| Policy | Brought in
| Insurance cover (Rs)
| Annual Premium
| Premium
payable till
|
| Money-back plan | 2000 | 1.5 lakh | 21,000
| 2012
|
Child plan
| 2003 | 1 lakh | 14,750
| 2023
|
| Endowment plan* | 2007 | 2.5 lakh
| 16,750
| 2027
|
Ulip
| 2004
| 4 lakh
| 20,000
| 2014
|
| TOTAL | | 9 lakh
| 72,500 | |
* For wife
| | | | |
I am paying a premium of Rs 72,500 a year for four policies that cover me for Rs 6.5 lakh and my wife for Rs 2.5 lakh. I am 33 years old and have two children. We live in our own house and don’t have any outstanding loans. Which of these policies should I surrender so that I can get more investible surplus?— Hitesh Gurunani, Dehradun
Life insurance is one of the most important, most bought but least understood financial products. Most people buy insurance policies in haste and then repent at leisure. Let us examine the options before you.
Option I:
Stop paying premium and let policy lapse If you stop paying the premium within three years of purchasing an endowment plan or a moneyback policy, the policy lapses and the premiums paid are forfeited. Only one of the policies (which covers your wife) is less than three years old. It is an endowment plan which will give you about 6-7% annualised returns. It’s your call whether you want to continue with it or take a hit of Rs 16,750 that you have paid as premium for the first year. From the next year, you can invest this amount in mutual funds.
Option II:
Surrender the policy If the premiums have been paid for at least three years, the policy can be surrendered. If the policy is in its initial stages (3-4 years old) the surrender value is only about 30% of the premiums paid plus any bonuses that may have accrued till then. Towards the end of its term, this can be as high as 80% of the premium. Your money-back policy and child plan can be surrendered but that would also end the life cover.
Option III:
Turn the policy into a paid-up policy This is possible only if three years’ premiums have been paid. You no longer have to pay the premium but the life cover continues with a lower sum assured. The corpus of the policy is used to pay for the life cover for the rest of the term. You also get all bonuses and benefits that accrued till the policy is converted to paid-up. You lose a lot of money if endowment and moneyback plans are foreclosed.
Therefore, it is better to convert them into paid-up policies. Terminating a policy before its maturity also has tax implications. For instance, if a policy is terminated before the completion of three years you stand to lose on the tax exemption on the premiums paid earlier.
The Ulip in your insurance portfolio is perhaps the only policy that you should continue with. Since you have paid premiums for four years, the painful years of high initial charges are already behind you. Now it is just like an investment in a tax saving mutual fund. In fact, it is even better because it allows you to shift from debt to equity and vice versa depending on market conditions and has lower annual recurring charges.
This is an interactive section for investors. Do you have a query regarding your investments? Write to us at letters.moneytoday@intoday.com and we will give a detailed answer.
