Ganesh Shankar, 68, was coaxed into buying a unit-linked insurance
plan (Ulip) by his relationship manager. The 10-year plan has an annual premium of Rs 1 lakh. When Shankar received the policy
statement in the third year, he realised that the value of the Rs 2 lakh premium he had already paid was down to Rs 92,000. The policy
had a sum assured of a mere Rs 1 lakh. Now he wants to stop paying further premiums
and surrender the policy.
Like Shankar, many don’t realise that with higher age, the premium for life cover also increases and eats into the funds
allocated for investment. Only after the first or second year do investors realise their mistake. Making a hasty decision to surrender the policy
may not, however, be in your best interests always. Many reports in the past have shown that when buyers surrender their investment-cum-insurance
plans, they only add to insurers’ profits.
Not everyone wants to surrender his policy
due to erosion of wealth. There are other reasons, too. An individual could be moving out of the country and may prefer to buy an insurance
cover in the country of residence. Also, insurance
plans vary in nature. There’s no standard answer to the question of whether surrendering a policy
is the best option. Even among Ulips, the answer depends on whether the policy
was bought before or after the laws were overhauled.
Shankar is lucky to have bought his Ulip
after the regulator overhauled the charges for the category. Just over seven years earlier, insurers paid commissions as high as 90 per cent of first-year premium to agents. Ulips of those days offered a nasty deal to investors, though the high costs charged from them were very profitable for the insurance
company and the agent selling the product. Regulatory changes have fortunately turned matters substantially in favour of the investor. Ulips are no longer a bad word and may be considered by an investor who knows what purpose or goal the product will serve in his financial plan.
Ulips bought before 2010
An investor who has stayed with the old Ulip
for a long time has got over the hump. High charges have already been applied in the initial years. Now, the returns would have improved to be at least at par with fixed deposits. Even if you had bought a policy
that invests all the funds
in equities, in say 2007-08 when the market was close to its peak, you would still be in profits. If you have diligently paid the premiums, you should begin to see the benefits now. Things will get better with time as the charges will be lower going forward. A policy
with all the investments in debt funds
would be giving returns at par with bank fixed deposits by now. If your policy
has a tenure of 10-15 years or more, stay with it. With professional fund management, your returns should get better in the future.
A person who had bought a ULIP
about a dozen years ago and not contributed to it after three-four years needs to check the terms of the policy.
Some old policies require that premiums
be paid for at least three years, and others require it to be paid for at least five years. The policy
may have lapsed due to non-payment of premium. If it has not lapsed, the investor should wait until maturity as the investment value is likely to be higher than if he surrendered it now.
Ulips bought after category overhaul
In the past, not many investors were aware that they should keep insurance
and investment separate. For them, insurance
was among the most preferred avenues for investment. Today a rightly chosen Ulip
can be a competitive investment, but the investor needs to be able to ensure that his relationship manager has put him ahead of the commissions that the product pays. A bad product is best surrendered.
The revamp in insurance
regulations has led to greater clarity about costs for investors who seek it. The disadvantage of a large upfront commission can be covered over the long term with the mortality charges and other costs dropping as a proportion of the annual premium. An investor would recover most of the costs and also pay no surrender cost on a policy
held and kept current by paying the premium for at least five years. Surrendering a policy
before five years, on the other hand, means losing all or most of the premium paid.
The tax benefit under Section 80C on investment in life insurance
is available only if the sum assured is at least 10 times the premium paid. On surrender of the policy
before five years, the tax benefit claimed earlier is reversed and tax has to be paid. However, surrender value is tax-free if the policy
is surrendered after five years. The death benefit is tax-free at any time under Section 10 (10D) of the Income Tax Act.
The surrender value of a life insurance policy
depends on the type of policy
and its terms, which vary from one insurer to another. No charge is levied if a Ulip
has been kept alive and the premiums
have been paid regularly for five years.
The surrender value of a traditional plan is calculated by the following formula: (number of premia paid/total number of premia) X sum assured. For example, a 20-year endowment policy
with an annual premium having a sum assured of Rs 10 lakh for which the premium has been paid for 10 years will have a surrender value of Rs 5 lakh ((10/20) X 10,00,000). With early surrender, the investor loses some premium paid and returns.
Term plans have only a death benefit and no surrender value. A Rs 25 lakh term policy
will pay Rs 25 lakh on death. The policy
lapses if the premium is not paid and no money is returned to the policyholder. This is the cheapest insurance
for pure risk cover. Sensible individuals should buy a term plan to fulfil their life insurance
To surrender a policy, you have to fill a form and submit it with the insurer. Documents to be submitted for policy
surrender include policy
surrender form, policy
bond or document, a self-attested copy of ID proof, a cancelled cheque or a bank attested account statement or a bank-attested copy of the passbook.
When to exit
If you have completed eight years or more in a traditional plan
If you have completed the mandatory lock-in of five years in new Ulips
If the sum assured is not 10 times the premium
The writer is CEO, Right Horizons