This is in continuation to the earlier “Part 1 – Should we exit an insurance policy through surrender or paid up?” It explains your eligibility for the options depending on the kind of traditional life insurance policy you have, when it has been bought and how many years of premium have been paid. It also explains what you really ‘get back’ for each option.
In summary, there are 4 options.
1. Continue with your policy
2. Lapse your policy and exit
3. Surrender your policy
4. Convert it into a “paid up” policy
Taking the decision with your traditional life insurance policy is not so easy. The situation you are in is like being on a plane with its engines on fire! Will it make it to the nearest airport? Should you jump off the plane and hope you will be able to get the parachute to open? Or is there a better chance if you simply stay on board and just glide it to land safely on a nearby lake? Tricky, nah?
Taking the Decision on your Traditional Life Insurance Policy
Here’s an example of a traditional life insurance plan from a real customer which you will probably relate to, and which will help you to take a decision on your own policy. Please note that all numbers are rounded off for the purpose of illustration.
|Insurance Policy Type||Traditional Life Insurance Policy of ABC Insurance Company|
|Policy Bought in||Nov 2009|
|Premium||Rs. 30,000 paid annually|
|Sum Assured||Rs. 5,00,000|
|No. of Premiums to be paid||16|
|Term of the Policy||25 years|
|No. of premiums paid so far||5 (Nov ’09, Nov ’10, Nov ’11, Nov ’12, Nov ’13)|
|Total premium paid so far||30,000 x 5 = Rs. 1,50,000|
|Total accrued bonus so far||Rs. 1,25,000|
|Current status of the policy||Active, In Force|
|Choices we have||Continue, Lapse, Surrender, Paid-up|
To understand each option, have a look at the table below or click here to view it full screen.
Option 1 : Continue with your policy
The yield for traditional life insurance plans is in the range of 4.5% to 6.5%. If you continue to pay premiums for 16 years, expect to get approximately Rs. 12 lakhs as all inclusive Maturity Benefit that is tax-free under Section 10(10(d)). The net yield works out to be 5.2%. Simple and clean.
Option 2 : Lapsing the Policy
Stop paying premiums and don’t do anything. If you have a lot of money and don’t care about the 5 premiums you have already paid, just sit quietly and lapse your policy. Pay no heed to the several reminder notices and lapse alerts that the insurance company may send you. Write off Rs. 1,50,000 and don’t blame others that you had no choice. You actually did.
Option 3 : Surrender the Policy
Go to the insurance company and tell them you want to surrender. As per the surrender values for premiums paid and bonuses mentioned in Part 1, you will get back Rs. 94,650. If you badly need money, this is indeed an option. But with a 15% loss, it is obviously not a sensible decision.
Option 4A : Convert the Policy to “Paid up”
If you are clear that you do not want to continue the policy, this is perhaps the most sensible option. Your policy Sum Assured is reduced and you can also expect to get about Rs. 2,81,250 on policy maturity – a yield of about 2.8%, but a positive yield nevertheless.
Option 4B : Convert the Policy to “Paid up” and Re-invest the Balance
Here’s another perspective. If you were to convert the policy to “paid up” PLUS start investing the remaining Rs. 30,000 for 11 years into other financial instruments such as PPF, Balanced Mutual Funds, Equity Funds, Sector Funds, etc. there is a chance that you will get higher returns, especially given the long duration. Of course, you should be reminded that these are riskier options than the traditional life insurance policy which comes with a large element of guarantee and near-zero risk. So higher risk, higher returns. Also, there is no life cover now.
If such an investment yielded 7% (net of taxes), the overall yield including the paid-up value for the first 5 premium installments would be around 5.3%, almost what you would have got had you continued the policy. Is it really worth taking the risk then?
But if you feel you can get 8% or 9.5% returns (net of taxes), the overall yield including paid up value can go up to 6.9%, equivalent to more than Rs. 4 lakhs extra in terms of value. Whether taking that higher risk is worth it, is entirely your call based on your judgment. And if you are unsure, just staying put and continuing with the policy is not a bad deal either.
Hope this gives you a fair idea. Do remember the following.
- If you have paid lesser no. of premiums, it is more likely that you can earn higher returns through other instruments.
- If you have paid more no. of premiums, it may not be wise to take that extra risk. Continuing with the policy could be a safer bet.
- If you have less than 10-12 years to go before the policy ends, you could continue rather than convert to “paid up”.
- If you have more than 10-12 years to go before the policy ends, the longer duration can help you get better returns through equity products, provided you are ready to take that risk and willing to forgo the life insurance cover.
We hope you got some clarity with these two articles. Good luck with your decision, and Godspeed! And the next time onwards, don’t get on board a plane that is unsure to reach its destination! 🙂
Life Insurance is mainly for protecting your family from the financial impact of unforeseen events like your death. The ideal plan to buy is a term insurance plan. Here’s more on the benefits of term insurance.