Stuck with a policy or find the premiums too steep? Here are some ways to exit with the least damage

Imagine this: You are out shopping on a street known for offering the best bargains; after much haggling and deliberation , you pick up a pretty-looking outfit. Then you come across another vendor who is selling a similar dress at a substantially lower price. You feel cheated sand resentful towards the other shopkeeper. Perhaps that's exactly how many unit-linked insurance plan (Ulip) holders who had purchased these policies before September 1, 2010 must have felt once the cap on Ulip charges imposed by the Insurance Regulatory and Development Authority (Irda) came into play. The new regime ensured lower charges which, in turn, could translate into higher returns.

If you have purchased a Ulip before September 1, or for that matter, wish to exit any life policy because it's been mis-sold or because you are unable to pay the premiums, terminating the policy is not the only option. Insurance policies come with exit options, albeit with some losses in the form of charges.

The charges (such as premium allocation, policy administration in Ulips) are usually front-loaded, which means a smaller proportion of your premium is invested in the initial years. If you surrender the policy during the initial years, say three years from its inception, the surrender value will amount to roughly 30% of the premiums paid to date. Also, insurance companies leave out the premium paid in the first year while calculating the surrender value, resulting in a lower payout. Hence, you should explore this option only as a damage-control measure and not for booking profits when the market goes up. Here's help on decoding the alternatives available for dealing with an unsatisfactory policy.

Ulips Bought Before Sept 1:

Even if you discover within a year that your policy is unsuitable, it will be wiser to wait till the completion of three policy years before taking a call on making an exit. "If the Ulip is surrendered before completion of three policy years, the fund value, after deduction of applicable surrender charges, if any, on the day of surrender will be disinvested and will be paid after completion of three policy years," explains Kamalji Sahay, CEO, Star Union Dai-ichi Life Insurance. On the other hand, after three years, the fund value is paid out immediately after deduction of the applicable surrender charges.

The New Regime:

The lock-in period for Ulips has gone up to five years. If you wish to surrender the policy before the completion of five years, the fund value, minus surrender charges applicable as on the day of surrender, will be credited to the discontinued policy fund. "The proceeds of the discontinued policy i.e., the surrender value with interest, shall be paid immediately after completion of first five policy years," adds Sahay. No surrender charges will be levied as the new Irda guidelines have done away with them for policies that are over five-years old.

Cover Continuance Feature:

Applicable only to Ulips sold before September 1, cover continuance feature comes into play post the lockin period of three years, if you have opted for it. It ensures that the sum assured is payable in the event of the policyholder's demise, even if all the premiums have not been paid. However, remember that the insurance company will continue to deduct charges regularly as per your policy contract. Therefore, the cover will cease to be in force if your policy's fund value/surrender value falls below the minimum amount specified. In such a situation, the policy will get terminated and the fund value in your account will be paid out on maturity.

Paid-Up Policies:

In case of traditional endowment plans, you can also choose to let them become paid-up ones after three years of paying premiums. Your investments until then will be locked in at that level. "In a paid-up policy, the sum assured is in proportion to the number of premiums paid. For example, if the policyholder has paid four out of 10 payable premiums, then the life cover payable in case of death is 40% of the original amount. Hence, in case of death/maturity under a paid-up policy, the reduced life cover along with attached bonuses is payable," says Gaurav Rajput, associate director, marketing, Aviva Life Insurance. Traditional plans, typically, are converted into paid-up policies after a minimum number of premiums have been paid. This may range from one to three years, depending on the product and the company.

Make Careful Choices:

Simply study your insurance contract carefully before giving your assent. Life insurance is a long-term contract and you will incur some losses if you exit the policy mid-way. Therefore, make sure you do not go merely by your agent's oral promise. If you have skipped scrutinising the terms and conditions at the time of signing the agreement, use the mandatory 15-day free-look period that is at your disposal once you receive the policy document.

REFUND STATUS

For Ulips bought before Sept 1, 2010

If you surrender the policy before 3 years, you will get the fund value minus surrender charges after 3 years If you exit after 3 years, you will get the fund value immediately after deduction of surrender charges.

For Ulips launched after Sept 1, 2010

If you exit before 5 years, you'll get the money only after 5 years, as these plans have a five-year lock-in You can use the cover continuance built into some Ulips bought before Sep 1 to keep the policy alive even if you have stopped paying the premiums Convert traditional policies into paid-up ones after paying premiums for 3 years to keep the policy going till maturity even if you've not paid the remaining premiums.

Source: http://epaper.timesofindia.com/