Jan 5, 2009

How to Surrender or Get Rid of Life Insurance Policy - Various Early Exit Options

Have you ever wanted to discontinue your life insurance policy?

There might be plethora of reasons to get rid of your life insurance policy – financial constraints (can’t afford to keep up with the premiums, too many life policies (want to rid yourself of unwanted life policies), non-satisfaction with the current life policy (as it was initially bought for the wrong reasons), or availability of better investment options.

Well, if you're really desirous of dumping your life insurance policy, there are various exit options available. Here is a lowdown on how to make an early exit from a life insurance policy.


Term Plans
Term plans are the life insurance contracts without savings component and are easiest to dump. You just don’t renew your policy.

As there is no money back or return obligation, the pure insurance plans don’t have any surrender value. Put another way, you’ll not get back anything if you fail to renew your term policy.


Traditional Policies (e.g., endowment, cash back, whole life)
Here there are 3 different ways to exit midway:

1. Let the insurance policy lapse
Out of various exit options, the easiest way out is to stop paying your insurance premium. In case you want to forego your policy within first three years, there is no other way but to let it lapse by not paying the renewal premium. Here you don’t get anything back and all your premiums paid go waste.


2. Surrender the insurance policy
The second exit option is to surrender the life policy. It is the voluntary termination of the insurance contract by the policyholder before the maturity. If you cancel (exit midway before maturity) the policy you get surrender value. In other words, it is premature encashment of the life insurance policy.

For traditional life insurance policies such as endowment, money back or whole life, there can’t be any surrender during the first 3 years because surrender value is nil. Even thereafter during the early stages of policy the surrender value is just a fraction of the total premiums paid. It increases as the policy moves closer to the maturity.

The guranteeded surrender value is 30 per cent of the total premiums paid subsequent to the first year. For instance, if you are paying a annual premium of Rs 20,000 then in the 5th year the policy will have minimum surrender value of Rs 24,000 (80,000*33.33%).


3. Make the insurance policy paid up
After three years of policy term, you also have another option available of keeping the policy in force without paying any further premiums. In other words, by converting your regular policy into paid-up policy you don’t have to pay any more premiums and the policy life coverage continues albeit with a reduced sum assured.

The policy automatically acquires a paid up value if it has run for minimum period of 3 years and subsequent premiums are not paid.

The reduced sum assured bears same proportion to the original sum assured as the number of premium paid bears to the total number of premiums payable. Suppose the original sum assured was Rs 10 lakh and the policy term was 20 years. Now, if you surrender the policy in the 6th year (i.e., after paying 6 annual premiums) the reduced sum assured will become Rs 3 lakh (6/20*10).



ULIPs
In case of Unit linked insurance policies (Ulips), rules are a bit different.

On surrender of an ULIP, a surrender value is payable which is usually expressed as a percentage of the fund value. In other words, fund value minus surrender charges is equal to surrender value.

As per IRDA guidelines, if the Ulip is surrendered during first three years (i.e., due premiums have not been paid for at least 3 consecutive years from inception), the insurance contract ceases immediately, but the surrender value, if any, can’t be paid before the expiry of 3 years. In other words, unlike traditional policies where the policy lapses and you don’t get back anything for surrender before 3 years; Ulips acquire surrender value even before completion of three years but that is payable only after the completion of three policy years.

But the fund value of a ULIP is too low in the initial years (due to high front end costs) and surrender value is even lower because the insurance companies levy heavy surrender charges (levied as a percentage of fund value) during the initial years which vary from scheme to scheme and progressively reduce every year.

However, most of the Ulips usually provide for full surrender of the policy after 5 years without any surrender charges. Put simply, you get the full fund value without any extra costs. But there are exceptions also. To discourage, policy holders from making premature redemptions some Ulips levy steep surrender charges even after 5 years which may even go up to 10, 15, 20 or 25 years.

Besides, unlike traditional policies Ulips also allow part surrender (i.e., partial withdrawal) after 3-5 years without any cost and without any reduction in the insurance coverage. For more details, please see, 5 hidden facts about Ulips.

Furthermore, if due to financial constraints or due to any other reason, you’re unable to pay premiums after 3 years, nothing to worry about. You can stop paying premium without surrendering the Ulip. Put another way, for Ulips, there is another option of ‘cover continuance’ available after completion of 3 policy years. If you opt for this option you can stop paying premium after 3 years and still your policy remains in force and your life insurance cover continues.

However, remember that applicable charges such as mortality, fund management and administration are automatically deducted out of fund value by cancellation of units. Besides, if the fund value falls below the one year’s premium then the policy is terminated and the balance fund value is returned (Foreclosure of policy). In other words, you can continue the policy without paying the premium till the value of investment is greater than one year’s premium.

Finally, a word of caution. For actual application of various exit options discussed above, you should carefully read the policy fine print before making the decision. And always keep in mind the adverse effects of terminating your life insurance policy.

Also see:

1. Understanding Life Insurance: Ask Yourself a Few Questions

2. 5 Common Myths about Life Insurance

3. Most Amazing Fact about Life Insurance

4. 7 Basic Features to Know about Life Insurance policy

5. Health Insurance: Practical Guide

7 comments:

  1. Dear Sir,
    Whoever has posted these details about ULIPS must know that there are such companies in market who charge 100% as a surrender charge if the premium is not paid for 3 years. I am dealing with the problem.

    Sushant Misra

    ReplyDelete
  2. excellent article
    i have a TATA AIG Nirvana Pension plan which is six yrs old.
    Advice whether to continue or exit.
    if i need to exit then what would be the best way out.

    ReplyDelete
  3. Sir,
    I availed LIC's Jeevan Shree-II on 2005 and have paid Rs.25,445/= per year. ie) I have paid for 5 years.(Total amounts Rs.1,27,225).Another 11 years to go. The estimated/expected returns @ maturity (ie on 2030)is 11,75,000/=, says LIC agent. I'm in dilemma to continue or get rid of this policy. Please guide me. - Sathish

    ReplyDelete
  4. Sathish,

    Continuing such policies amounts to throwing good money after the bad.

    ReplyDelete
  5. I have a Lic moneyplus table180 policy taken in sept2006, I have paid premium for 3 years, I am paying an annual premiun of Rs.50000/-

    Similarly I have a HDFC young star plus plan with annual premiun Rs.20000/- for which i have paid 4 years premium

    For both the policies the entire fund is put in growth fund.

    Please advice whether to continue both, if so what are the prospects.

    ReplyDelete
  6. Hi,

    I have a LIC Policy with an annual premium of Rs. 23,700 and a life cover of Rs. 5 lakh and a accident cover of Rs. 2 lakh.
    From what I have read in your blogs so far, I am getting a feeling that's its a waste of money to remain invested in it ? Is it correct?

    Also I would like to know that should one keep atleast some portion of funds in policies like LIC and other Ulips.. to get the portfolio diversified and increase the liquidity of funds..

    ReplyDelete
  7. dear fisher,
    thankyou very much for your extremely useful posts. In all my internet years i didn't write any comment,but you are wonderful.
    I have one question
    i have lic policies of of 20000 since 10 years(jeevan surbhi,jeevan chhaya,money back).total amount paid is two lacs and still 10 more years remaining. my wife has jeevan anand of 27000 since 5 years(total amount paid is 135000)and money plus of10000 since 5 years(total 50000). now these polices seems waste of money, but amount invested is too high. please guide we should stop these or continue, if stop how?
    dheeraj upadhyaya

    ReplyDelete

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