Weeding Out Junk

Chandralekha Mukerji        Print Edition: March 2012

A ten-year insurance plan you bought in a hurry just to save tax or a unit-linked policy some insurance agent or a bank executive persuaded you to buy when a simple term plan would have better met your requirements are situations we are all familiar with.

While there is nothing wrong in discontinuing such policies, it is important to know the correct way to handle such a situation.

READ:Reworked Ulips may not offer better returns

While most of us know the risks of being under-insured, being over-insured can be equally damaging.

"Most people continue unwanted policies without realising the negative effect this has on their overall financial portfolio. They pay more premium than required, which could have been invested for better returns," says Divya Gandhi, head, general insurance and principal officer, Emkay Insurance Brokers.

So it is important to review your insurance portfolio from time to time to know what's redundant. "As life insurance is a long-term product, one can review every two to three years. In case of unit-linked plans, you can track the funds more frequently, say, once a quarter," says Anil Rego, CEO, Right Horizons.

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Typical situations that call for a review include change in income or expenses, birth or death in the family, a medical condition that will alter future expenses, acquiring assets such as a home or a car, a new loan or any other increase or decrease in liabilities.

"Policies bought to build a contingency fund become unnecessary if the financial need is fulfiled by the primary investment meant for it," says Satkam Divya, business head, Rupeetalk.com.

  • Make sure your life doesn't remain uncovered at any point. You must have another policy or funds that will keep you financially secure.
  • Find out the type of policy and its maturity date. Evaluate whether the surrender value, if re-invested, will give sufficient returns.
  • Check whether you have an alternative investment to fulfil the goals that were to be met by this policy.
  • If financial crunch is the reason to quit, compare the premiums of similar plans. Chances are that you may find a cheaper policy.
For instance, an endowment plan taken to fund your child's college expenses will become useless if mutual funds earmarked for the purpose amass the required amount. In such a situation, it makes sense to surrender the policy and invest the premium in avenues that give better returns.

Regulatory changes can also trigger a review. "The new guidelines on Ulips completely restructured the product. This is an appropriate trigger," says Rego.

The solution depends on the plan you want to discontinue and the situation you are in. This is especially true for long-term life policies, such as Ulips and endowment plans which have a savings component.

If premium is becoming a burden, many policies give the flexibility of stop payment without withdrawing the capital.

"Converting an endowment policy into a paid-up plan means you can stop premium payments, but your insurance cover will come down by the same proportion. So, for a Rs 10 lakh cover with a term of 20 years, paying premiums for four years before making it a paid-up policy will bring down the cover to Rs 2 lakh as you have paid for just 20% of the term," says Gandhi.

"Loans against policies can be used to pay your short-term dues," says Rego.

In Ulips, the decision of whether to discontinue or not will depend on the premiums paid and the period left for maturity. Ideally, unit-linked plans give best returns when held till maturity.

Ulips have a 5-year lock-in (for policies bought before 1 September 2011, it is three years) and one should try to retain the policy at least for this period.

"With coming of new Ulips, if your aim is to upgrade, look at the performance of the existing policy and calculate the surrender value before moving to a new plan," says Rego.

Policies held for several years become rewarding with age as the insurer has already recovered its expenses. Benefits at maturity are huge. "If near maturity, it doesn't make sense to miss the huge payout you will get at the end of the tenure," says Divya.

Even if you are half-way to the maturity date, there are some serious calculations you must do.

"If you are planning to surrender and invest the proceeds in another scheme, remember that you'll first have to recover the loss before you start earning any return. So, surrender only if the new investment opportunity is exciting enough," says Pankaj Mathpal, a certified financial planner and MD, Optima Money Managers.

Timing is also important. If it's a market-linked plan, giving up the policy when the markets are at a low point will be foolish. It is also not advisable to cancel a policy if you don't have alternative ways to insure your life.

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