Insurance should be taken after giving sufficient thought to your requirements. Like, for how long it is needed and what kind of policy may suit your needs and so on. And insurance plans may not be required to satisfy every need. In many cases, insurance is taken without understanding the product, benefits, tenure, liquidity and other aspects. It is bought on sheer recommendation or to help a friend / relative or to save tax in the eleventh hour.
The last two reasons are the most common ones. As a result, most policies which are bought do not suit the buyer’s requirement. Therefore, when new clients come for financial planning, planners find a whole host of lapsed policies, which can or cannot be revived. Here’s how financial planners decide on whether to retain clients’ lapsed policies or not. You could also review your insurance holding in the same way.
Firstly, look at it from the point of cash flows. For that, you need to look at the amount of insurance or total cover that the policies are offering and the premium that you are paying towards all the policies. If the amount of insurance is low and the premium is also low, not putting pressure on the cash flows, in terms of goal achievement, then the policies could be retained.
|HOW TO DECIDE IF YOU SHOULD RETAIN YOUR LAPSED POLICIES
- Retain policies that provide high cover for low premium
- Get rid of policies with high cost, low returns even if premium is low
- Policies charging huge premiums should be made paid-up or surrendered
- Children plans are not of much use as a child is the life assured
- Revive lapsed plans if you cannot buy a new plan
- Doesn’t make sense to revive term plans as you need to pay for the period already survived
But before that, you could also check if some of these policies are high cost, low return ones, in which case even if the premium is low, it may be a good idea to get rid of them. For that, study the surrender costs and the money you would get after surrendering such a policy.
You also need to see the suitability of a policy in the overall plan. Does the policy suit your requirements? Does it meet your cash flow, returns and liquidity needs? If it does not, it may be better to remove the policy from your portfolio.
On answering these questions, some of the policies would be found wanting. They would be the right candidates to consider for surrender. But, there are other points to consider before that.
One major problem in some cases is that policyholders pay such huge premiums that impact the achievement of short- and long-term goals. In such cases, either one has to stop paying the premiums and make it paid-up or surrender the policy.
In case a policy is paid-up, there will be no need to pay money for those policies and the payment would come in only at the end of the policy tenure. If that suits you, opt for it. Here, the existing cash going for paying the premiums can be utilised for other investments / goals.
In other cases, not only does premium payment need to stop but also the amount locked up in an insurance plan should also be freed to be deployed profitably to achieve goals. However, one needs to understand that when one surrenders a policy, the amount that one gets back is very low. Say, one had bought an endowment policy of Rs 1 lakh for 20 years and is surrendering after 10 years. The surrender amount would work out to approximately Rs 42,000, whereas the premium paid over the 10-year period would be about Rs 36,000.
Endowment policies typically, earn in the range of 5-6.5 per cent and moneyback policies make 4-4.5 per cent. Returns from unit-linked insurance plans (Ulips) are market determined. The good thing about insurance policies is that the maturity proceeds are tax free. From that perspective, consider the policies taken as part of their debt investment portion, where such investment is integral to the plan. It may compare well with an investment in National Savings Certificate (NSC), which would offer that kind of returns to a taxpayer. If you are not a taxpayer, then insurance policy proceeds do not offer much attraction.
Children plans are not of much use as a child is the life assured, and who are dependent on their parents. These policies can be paid up or surrendered.
Financial planners often find policyholders holding lapsed policies. Some of these could be revived. But that would vary. If a policy is a right fit, it can be revived. Also, if the person may not be in a position to get new insurance, revival may be a good option. However, on application to revive a policy, they would ask for the person’s medical condition. If that has deteriorated, it may be difficult to revive the policy.
In case of a term insurance policy, it may not make any sense to revive it as one has to pay premiums for the periods one has already survived. It would be better to consider taking a new term policy itself.
After this exercise, we suggest taking appropriate life cover through term policies, which are very inexpensive these days. Most people, including insurance companies have forgotten that the primary job of an insurance policy is to offer protection. But, that is the most important aspect to consider — to protect a family against an unfortunate calamity. This is what we have to keep in mind.
The writer is a certified financial planner