Want to discontinue your policy?

we come across many individuals who either have not been able to cough up the high premiums on their unit linked insurance plans (ULIPs) or they do not wish to pay the premiums on their low yielding traditional insurance policies. Either ways, they are not clear about the impact of discontinuing the policy. In this article, we explore this scenario at length and the implications involved.

Having obtained a life insurance policy, you are required to pay the premiums on the due dates as mentioned in the policy document. However, insurers do allow for a “grace period” for the premium payment. Payments within the grace period are stipulated to be “on time” payments. The grace period usually lasts for one month for yearly, half yearly and quarterly premium payment modes and 15 days for the monthly payment mode. The trouble begins if the premium is not paid even within the grace period or if you decide to discontinue the policy like many ULIP investors have done in the recent past, after realising that the policy doesn’t quite fit into their scheme of things.

In such a scenario, the policy is considered to have lapsed and all the premiums paid are forfeited. More importantly, the insurer doesn’t entertain any claims once the policy lapses. However, it should be understood that the policy is not necessarily forfeited i.e. the policy’s value doesn’t become nil. The Insurance Act does not allow for forfeiture as every policy acquires a reserve based on the premiums already paid.

The Insurance Act provides for a return to the policy holder of an amount that is representative of the reserve and this is referred to as the ‘Surrender Value’ or the ‘Cash Value’. The Insurance Act stipulates that every insurance policy shall have a guaranteed Surrender Value, if at least 3 years’ premiums have been paid. This reserve arises due to the following:

1.Premiums in the early years of the policy being more than what is justified.

2.Savings element in the premium.

Apart from the option of surrendering your policy, insurers like LIC also provide other options like making a policy ‘paid-up’, whereby the policy remains in force with a reduced sum assured, depending upon the number of premiums paid. Another option is to keep the policy in force by deducting future premiums, from the Surrender Value. A third option is to provide term insurance subject to the condition that the Surrender Value is more than the sum assured.

Since surrendering the policy is the option most commonly availed by policy holders, let’s explore how the Surrender Value (obtained at the end of 3 years) is calculated.

The following table illustrates the returns that a policy holder can clock from a ULIP, if the same is surrendered after premium payments have been regularly made for the first 3 years. We have assumed that the policy holder pays an annual premium of Rs 30,000 and that his investments (after adjusting for the expenses) grow at 15% per annum.



Given the above-average returns provided by ULIPs over the last few years, thanks to the stock market rally, our assumed rate of return (15%) may seem rather conservative. However, this is the return we expect domestic equity markets to generate over the long-term.

As is evident from the above calculations, the portfolio value of a ULIP in the intial years can be rather disappointing; in effect the Surrender Value, which is a percentage of the portfolio value, could be even smaller. The prime reason for this is that in the initial few years, a substantial proportion of the premium paid is utilised for servicing the various expenses related to the policy – as high as 70% in some cases. This means that the proportion of the premium used to provide for the Surrender Value is not the entire premium amount, rather it is the premium net of expenses.

It is evident that surrendering a ULIP after having paid the premiums for the first three years may be an unwise option. But then, continuing with high ULIP premiums only at the behest of your agent is even more unwise and over the long-term this could hurt your finances a lot more.

The solution lies in exercising due care and making an informed decision at the outset while deciding to take life insurance. However, for individuals who are saddled with the wrong policy it’s an unenviable situation. We recommend that they consult their financial planners/insurance advisors and then decide on continuing the policy based on the merits of the case and their finances, among other factors.

How ULIP schemes mislead investors? -- By Amar Pandit

Unless you are the kind who does not watch television, “Bajaj Allianz super agent mujhe apna tax bachchana hai” is an advertisement one can see over and over again, these days.

Given the fact that it is that time of the year when insurance companies hope to get a bulk of their business, this flood of advertising is not surprising. The advertisement emphasises on the time tested cliché of insurance being a tool to save tax rather than a tool to hedge against the risk of dying early.

Likewise the advertising billboards of Mumbai are loaded with Chintamani advertisements with punch lines like ‘don’t just settle for tax planning but also do life planning’.

These advertisements are a part of the misleading sales pitch that most insurance companies and insurance agents make these days to solicit business.

One of our acquaintances Rajesh, who had seen the Chintamani and Bajaj Allianz advertisements, was approached by a private bank to sell him an insurance policy from Bajaj Allianz. The usual sales pitch was made emphasising the following points:

This Unit-linked insurance plan has delivered 40% return in the last few years.

You just have to pay the premium for 3 years and you can exit after 3 years if you want.

You will save tax of around Rs 33,666 if you fall in the highest tax bracket.

We are the number 1 private insurance company in the country.

“What more do you want from a policy? How come I missed this gem” he thought. The same pitch was made to around 30 more of his colleagues who work for a renowned hospital in Mumbai.

Rajesh was recently shocked to see Bajaj Allianz charging around 72 % as premium allocation charge during the first year of policy. What this meant was that only 28% of the amount would be invested. He failed to understand the rationale.

The bank had not told this while selling him the plan. His colleagues had the same experience. They couldn’t figure anything out looking at the statement either because most of the insurance statements are so complex that it would require a higher than normal financial quotient to decipher the charges.

So they innocently shot of a letter to Bajaj Allianz asking for a refund of the 72 %, which they thought was rightfully theirs. Several reminders yielded no response from the insurance company. Finally they managed to speak to someone at Bajaj Allianz. The company shrugged it off and blamed the bank for the mis-selling. Such cases are common where insurance companies often wash their hands off after such bouts of mis-selling and look for scapegoats. This example is essentially a microsm of the whole.

The marketing and selling systems of insurance companies are prone to such messes as insurance agents are incentivised to sell ULIPs by running various contests right from a Free Trip to Dubai to a Toyota Corolla Car. When insurance companies dangle the carrots of paid foreign trips & more money for selling more, the advisory model is likely to take a backseat as the interests of policy buyers are not aligned with the interest of policy sellers. Incentives are a part of any business. But it is one issue if an incentive by an FMCG company makes a retailer sell a different brand of shampoo vis-a-vis mis-selling an insurance policy. Unless insurance companies are penalised for such misgivings, such stories are bound to happen over and over again.

Here is my interpretation of the sales pitches made by insurance companies:

You can exit after 3 years: This does not make sense. The insurance companies typically recover a lot of money in the initial few years of the ULIPs through a very high premium allocation charge. So it takes several years for the investment to just breakeven. Additionally, the agent will sell you more insurance next year because even after buying this policy , you are still underinsured.

We are number 1: I am not too sure what that means. How does it help the individual taking the policy?

And if you hear the tantalizing returns, it means: “Though we say 30-40 % returns, it is only an appreciation in the net asset value (NAV) of the scheme and not the actual returns that you have got”.

A lot of ULIPs buyers still cannot believe they have not made any money despite the unprecedented bullrun in the equity market as insurance companies are smart enough to take out the expenses from the units and not the NAV.

How to avoid these mistakes

Take these ads not with a pinch of salt, but with a truck load of salt.

Your objective for tax planning should be to maximise your post tax income and not just to save taxes. These statements have different meanings and you would do well to understand them.

See if you are maximising investments under Section 80C. If not start with voluntary provident fund, public provident fund, equity linked savings schemes (tax-saving mutual funds) etc in that order of your risk tolerance for investments and opt for term insurance for insurance if you need one.

insurance questions you MUST ask

Hi All,
There are some questions you must ask your insurance agent before taking buying the insurance from the agent.
Is there any other policy that offers the same cover at a lower premium?
Which portions of the maturity benefits are guaranteed?
Are the advertised returns of the policy for real?
Is there a free look period?
What are the exclusions to the policy?
Can I backdate my policy?
Is there a discount on the yearly premium?
What are all the internal hidden charges?

Buy health Insurance for your family

Cost of insuring of family of four for 1.5 lakh each is Rs 6000. The total premium paid over 20 years would be Rs. 1.3 lakh. Two instances of hospitalization in 20 years would cost the family at least Rs.1.2lakh not only that we need the money at right time(if we are not having the health insurance). So the premium pays for itself. And the tax saved is a bonus.

Note:Under sec80D, Premium for a medical insurance plan is fully deductible for the taxable salary

Get yourself insured

Life today has become a lot more uncertain then ever before. Therefore, taking life insurance is another objective that should rank high in the priority list of all individuals. Simply put, the purpose of life insurance is to indemnify the nominees/dependents of the insured against an eventuality. So life insurance must form an integral part of the individual's financial planning exercise. In addition to life insurance, individuals should also be equipped with adequate medical insurance.

There are three types of life insurance plans; term plan, endowment plan and ULIPs(unit - linked plans), available at investor's disposal. While ULIPs are not an ideal avenue to take life cover, term plans, the cheapest and most effective form of life insurance are best suited for this purpose.

Life Insurance

The need for life insurance comes from the need to safeguard our family. If you care for your family’s needs you will definitely consider insurance.

Today insurance has become even more important due to the disintegration of the prevalent joint family system, a system in which a number of generations co-existed in harmony, a system in which a sense of financial security was always there as there were more earning members.

Times have changed and the nuclear family has emerged. Apart from other pitfalls of a nuclear family, a high sense of insecurity is observed in it today besides, the family has shrunk. Needs are increasing with time and fulfillment of these needs is a big question mark.

How will you be able to satisfy all those needs? Better lifestyle, good education, your long desired house. But again - you just cannot fritter away all your earnings. You need to save a part of it for the future too - a wise decision.



This is where insurance helps you.

Factors such as fewer number of earning members, stress, pollution, increased competition, higher ambitions etc are some of the reasons why insurance has gained importance and where insurance plays a successful role.

Insurance provides a sense of security to the income earner as also to the family. Buying insurance frees the individual from unnecessary financial burden that can otherwise make him spend sleepless nights. The individual has a sense of consolation that he has something to fall back on.

From the very beginning of your life, to your retirement age insurance can take care of all your needs. Your child needs good education to mould him into a good citizen. After his schooling he need to go for higher studies, to gain a professional edge over the others - a necessity in this age where cut-throat competition is the rule. His career needs have to be fulfilled.

Insurance is a must also because of the uncertain future adversities of life. Accidents, illnesses, disability etc are facts of life which can be extremely devastating. Other than the hospitalisation, medication bills these may run up it’s the aftermath of the incident, the physical well being of the individual that has to be taken into consideration. Will the individual be in a position to earn as before? A pertinent question. But what if he is not? Disability can be taken care of by insurance. Your family will not have to go through the grind due to your present inability.

Moreover, retirement, an age when every individual has almost fulfilled his responsibilities and looks forward to relaxing can be painful if not planned properly. Have you considered the increasing inflation and taxes? Will your investment offer you attractive returns under such circumstances? Will it take care of your family after you? An insurance policy will definitely take care of these and a lot more.

Insurance today has opened up new vistas for every section of society. Even for the village farmer insurance holds a lot of potential. Considering how dependent our agricultural system is on the monsoon, the farmer sees a dim future. The uncertainty of the monsoon too can be taken care of by insurance. Looking at the advantages of an insurance policy a number of farmers have gone in for insurance. Insurance has become a necessity today. It provides timely financial as also rewards with bonuses.

Why a Term Policy scores

I will talk about Term plane with out money back in this article

1. It is cheap
Let;'s compare a term Policy with and Endownment Policy in teerms of how much you will pay as premium. If you are say, 30 years of age, you would pay a premium of about Rs.1,800 to 4,740 every year ofr a 30 years Term Life cover of Rs 5 lakh.
In contrast, if you took a 30-years Endowment policy cover for Rs 2 lakh, you would end up paying a premium of around Rs.6,500 ot Rs.20,000 a year.
So, a Term Policy offers you double the cover for about one-fourth the premium.

2. You can circumvent the additional returns you would get from othere policies.
Going with the above example, if you do survive three decade, Nothing comes back in Term plane. But under the Endowment cover, you would get the assured sum (which is also known as your cover -- the amount you are insured for), plus a bonus (additional amount).So you could end up with around Rs 5 lakh (Rs 2 lakh + Rs 3 lakh as bonus) in total.

If you think that this is a good deal, hang on.
~ You pay the comany Rs 1,800 every year for the Term Policy.
~ For the Endowment Policy, where you get a hefty Rs 5 lakh back, you pay the company Rs 6,500 every year.
Now think about this alternative:
i. Pay the company Rs 1,800 every year.
ii. Take a Term Policy.
iii. Invest the balance of Rs 4,700 (Rs 6,500 - Rs 1,800), that you save as premium, wherever you want.
Consider stocks or equity mutual funds as an investment option over a long term. Your risks would be equally low, but your returns would be higher.
But remember: the key word is 'long term'.

3. You can get better liquidity if you put only a portion in Term Insurance.
Liquidity is a term used to denote how fast you can sell your investment and get money (liquid cash). So if you invest the notional 'difference' in premiums (Rs 4,700) between a Term and any other kind of plan in some investment (say, in a mutual fund), you can cash out all of it in an emergency in around 48 hours. In contrast, in an insurance policy, you have to pledge the policy and seek a loan against it.

Then pay an interest of about 8% to 10% on that loan.

4. You may end up getting underinsured.
If the premium is high, you might be tempted to go for a smaller sum as cover. Say you are 30 years old and looking for a life cover of Rs 20 lakh. You would spend about Rs 7,200 in a Term Policy.
In contrast, an Endowment Policy would set you back by about Rs 26,000.
Now, because you cannot afford Rs 26,000, you might be tempted to go for an Endowment Policy of only Rs 10 lakh that would cost Rs 13,000 a year.
Do you know what you have done? In one stroke, you have halved your life's financial worth!
If something were to happen to you, your family would get much less than they deserve.
Whatever policy you choose, don't meddle with the sum that you think your family deserves when you are gone.

The last word
Most life insurance companies in India offer at least one term plan each. Consult your insurance advisor for details. But don't expect him/ her to be enthusiastic about Term plans since insurance advisors get the least incentives for selling term plans. Insist on information till you get it.