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Cut your losses

P V Subramanyam 

Bought a wrong product and repenting now? Here are a few steps to correct your mistakes.

Have you bought a wrong financial product and wondered what to do with it? Welcome to the world of financial services.

Take just one financial product, life If already invested, check for these things:

When did you buy the policy? How much is the sum assured? How much is the premium that you are paying? How long do you have to make the payment? How long can you afford to pay the premium? Finally, do you actually (still) need the life

Take the case of T Aiyer, a chartered accountant who took a term life for sum assured of Rs 1 crore about seven years back, when he was 40. He is paying a yearly premium of Rs 57,000 for this cover. His has one daughter, who is earning well and is about to get married. The only dependant is his wife.

Term insurance rates keep falling and one should be alert to such opportunities. When he bought this plan, term insurance was far more expensive. Today, he can take a new plan from another company, priced at Rs 36,200. So, Aiyer should take a new plan for 17 years (he has this plan till the age of 65) and then surrender the old plan. This will save him Rs 20,800 per annum for the next 17 years.

Take the case of Anand and his wife, Lathika. Both engineers have 15 years of work experience and are earning very well. They do not have kids.

They had bought a unit-linked insurance plan (Ulip), with an annual premium of Rs 6 lakh. The plan had almost no insurance cover and was to invest all the amounts in debt instruments. Let’s run the plan through the above mentioned criteria. The policy was taken about six months back, so the first choice of giving it back in the free look period was lost. This is a statutory period of 15 days, in which you are allowed to give back the policy without any obligation.

Anand and Lathika had bought this product six months back and the sum assured was Rs 6.5 lakh. It was compulsory for them to pay the premium for at least three years to keep the policy alive and get some surrender value. The option to Anand was to surrender the policy and forgo the amount or Rs 6 lakh already paid.

This is a typical case of a bank asking a fairly young couple who did not need life insurance at all to invest in a sub-optimal savings plan. This plan will,at best, give them returns like a bank fixed deposit (it carries no life insurance) and the couple will get their money back after 10 years.

What could be done? Give up the Rs 6 lakh already paid! The fact is, just to protect this Rs 6 lakh, Anand and Lathika will keep paying Rs 6 lakh for the next five-six years, hoping the policy will give them a good return. However, the way it is structured, it cannot give good returns – all the money gets invested in government securities. Anand and Lathika decided to continue with the product and pay the premium for the next 10 years.

Another case was of Pradeep Nair, who had bought a lot of policies from the Life Insurance Corporation of India. He had a home loan of Rs 16 lakh, a seven-year-old son in school and his wife was employed in a private school, where the salary was paid irregularly. He also had a dependant mother.

He thought he had a big insurance cover, because he had bought a lot of insurance policies. In fact, Pradeep had bought one life insurance policy every year since the time he took up a job. So, in all he had 12 policies and he thought he was adequately insured, because he was paying a total premium of Rs 84,000. However, his policies were all endowment and money-back plans and his sum assured was a paltry Rs 7.3 lakh.

What could be done? There was really nothing to do with his existing policies. Most of the policies were for 20 years. The solution was to surrender some of the policies and realise the money. Part of this amount can be invested and he can take a term insurance with the rest of the money.

Pradeep did it. He surrendered some policies and made some policies paid up. On surrendering, he got an amount less than what was paid, even in cases of five-year-old policies. He then got himself a term insurance cover of Rs 30 lakh – and the payment of premium was on a half-yearly basis.

The next person who had bought a Ulip had a plan with a 70 per cent load and very high annual charges. The premium Mrs Vergheese had paid was Rs 10,000 per annum for the past seven years. On payment of Rs 70,000 as premium, the fund value in this life plan was only Rs 33,000. She didn’t know what to do. She had bought a Ulip and the entire amount was invested in debt funds. She had missed the whole equity boom, while taking the risk of a Ulip.

What could be done? The only sensible action for her was to surrender the plan and take whatever she was getting, instead of sinking more money into the plan. Shifting all the money to equities would not have made sense at the current level of the index. The low level of understanding that Mrs Vergheese had about asset allocation had caused more trouble in an already expensive product.

While there are options to correct the mistake you have done, the better way out is to not commit them in the first place. To avoid these problems, seek an expert’s advice and not agents, before buying the product.

The writer is a certified financial planner

First Published: Sun, October 31 2010. 00:34 IST