If you do not pay premium for three years, you do not get anything back from your life insurer Before buying a policy, you should assess your financial ability to pay your future premiums If you decide to surrender your insurance policy, the insurer will pay you the cash value or surrender value You will, however, suffer a loss if you surrender your policy before the maturity period
IN THESE tough economic times or due to personal problems, many people do not want to continue paying their insurance premiums and think of discontinuing their insurance policies.
While for some, the reason for discontinuing their policy would be a scramble for cash, for many others, it would be a sudden realisation that their policy is offering very low returns. But, many do not know that if you have not paid your insurance premium for three continuous policy years, you do not get anything back from your life insurer.
Before buying a policy, you should assess your financial ability to pay your future premiums. You should separate your investment and insurance needs. Insurance is not an investment avenue and should not be bought for high returns.
Why is it so? When a life insurance policy is in force for a minimum of three years, it would acquire a cash value.
The cash value is the savings portion of a life insurance policy. It is derived when your premium payments are more than the cost of insurance, whereby, the excess goes into a cash value account and draws interest. If you decide to surrender your life insurance policy, the insurer will pay you the cash value, also known as surrender value. You will, however, suffer a loss if you surrender your policy before the maturity period.
Surrender value of a traditional insurance policy: Due to high initial costs, a traditional insurance plan does not have a surrender value in the first three years. The amount of surrender value will differ across insurance companies and depends on factors such as number of premiums paid and for how many years, full tenure of the policy, type of plan (moneyback, whole-life plan, endowment plan), and the bonus accrued on the plan.
Most insurers pay the guaranteed surrender value, usually equal to 30 per cent of all the premiums paid minus the first year's premium, and all premiums in respect of optional rider, if any. Insurers also offer a special surrender value, or a non-guaranteed surrender value, which depends on the sum assured, bonus, policy term, number of premiums paid, and is higher than the minimum guaranteed surrender value.
In a moneyback plan, the surrender value will be very low because money is paid to the policyholders in frequent intervals. Similarly, in a whole life plan, the maturity tenure is very long and, therefore, the surrender value gets reduced as you have to discount for a long period. Term insurance plans do not have any surrender value.
Compared with whole-life and money back plans, endowment plans have a higher surrender value. Most traditional single premium plans pay around 90 per cent of the premium as surrender value, excluding premium for optional rider and extras, if any.
Also, although, in case of single premium policies, the surrender value is accrued immediately, you get the money only after three years.
Surrender value of Ulips: Unit-linked insurance policies (Ulips) are a combination of investment and insurance. The insurer will take into account the present net asset value (NAV), number of units left, sum assured and several other factors to decide the surrender value.
Since the major portion of your premium is deduced as charges in the initial years of a Ulip policy, it makes surrendering a Ulip before five years a loss proposition.
Since Ulips have a lock-in of five years, the surrender amount will only be paid after five years from inception of the policy.
Since Ulips have a lock-in period of five years, if you surrender the policy after completion of five years, there are no surrender charges applicable. The Ulip regulations have capped the surrender charges (as percentage of fund value) at 15 per cent for policies over 10 years, and 12.5 per cent for policies with tenure of less than 10 years.
With the volatility in the stock market's today, many who invested in a Ulip in the past one year, are seeing their fund value negative.
Many frustrated policyholders would be thinking of surrendering their plans. In such a case, where your fund value is negative, you should wait till the fund value improves. So, pay the premium for three years and then surrender. You can also make partial withdrawal and invest in some other financial instruments. Also, remember that Ulips do not have a loan facility.
Using the option of taking a loan against your policy: To get the loan value, one should know the surrender value, which is dependent on paid up value of the policy.
Paid up value: In case you What's in it for you 1 In a moneyback plan, the surrender value will be very low as money is paid to the policyholders in frequent intervals 2 In a whole-life plan, the tenure is very long and, therefore, the surrender value gets reduced as you have to discount for a long period 3 Compared with whole-life and moneyback plans, endowment insurance plans have a higher surrender value 4 Since Ulips have a lock-in period of five years, the surrender amount will only be paid after five years from inception of the policy 5 In such a case where your see the fund value to be negative, you should wait, pay the premium for three years and then surrender 6 Unless, you are sure that you will pay back the loan on your insurance policy in six to eight months, do not take a loan have paid premium continuously for three years, but, you have not surrendered your policy, then it becomes a paidup value, which will be paid on maturity or death, whichever is earlier.
Paidup value available at maturity or death = No of premiums paid x sum assured/number of premiums payable.
Unless, you are sure that you will pay back the loan on your policy in six to eight months, do not take a loan.
Also, never take a loan on a paidup policy as you are not paying a premium. So, the surrender value of your paidup policy will not rise as fast as the interest on the loan. Usually, the interest and the loan amount will become more than the paidup value of the policy in two years. As a result, the insurance company will cancel and forfeit your policy.
If you are sure of paying back the loan fast, then this option can be exercised as the interest rate is 9-10 per cent, compared with a personal loan, which will come at 15 per cent interest rate.
Your loan amount will be 90 per cent of the surrender value.
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