|
Executive Summary: Insurance Policies are far cheaper today. In last few years, mortality rates have fallen. Private sector insurance companies have come out with innovative features and more benefits. Insurance Regulator has improved the level of protection available to consumers. So you have better and cheaper choices available. Should you surrender your current policy and buy a new one? Let’s see.
|
You existing insurance policy could be a pure term plan or it could have an investment component. If it’s a pure term plan then it may not be a good idea to disturb it unless it’s very expensive. So just compare the current premium for online term plans for your age and if the difference is sizable then check the other parameters as mentioned below, if you should continue or surrender.
If it’s an Insurance + Investment plan then you should closely examine the charges structure, surrender charges, lock in period, fund performance, special features, alternate investments and current health and then take a decision.
Charges Structure: Generally, ULIP products are front loaded. This means that charges are higher in the first few years. We have observed ULIPs costing about 5% to 6% in the initial years. This includes only Premium Allocation Charges and Policy Administration Charges. This makes ULIPs very expensive and eats in to your profits. If your policy is costing you around 1% or 2%, it may still be OK to continue with the policy
Lock in Period and Surrender Charges: Check your policy clauses if you are allowed to surrender policy anytime or if there is any waiting period. Normally, you have to make the payments for at least 3 years. If you have crossed the lock in period, then check if surrender charges are prohibitive. Compare the surrender value to the total premium you have paid so far.
Fund Performance: If your insurance policy has a market linked investments, then check the performance of your fund. You can visit websites like www.morningstar.in and research your fund here. If your policy is expensive and if the fund is also not doing well, then it’s a Red Flag.
If it’s an Insurance + Investment plan then you should closely examine the charges structure, surrender charges, lock in period, fund performance, special features, alternate investments and current health and then take a decision.
Charges Structure: Generally, ULIP products are front loaded. This means that charges are higher in the first few years. We have observed ULIPs costing about 5% to 6% in the initial years. This includes only Premium Allocation Charges and Policy Administration Charges. This makes ULIPs very expensive and eats in to your profits. If your policy is costing you around 1% or 2%, it may still be OK to continue with the policy
Lock in Period and Surrender Charges: Check your policy clauses if you are allowed to surrender policy anytime or if there is any waiting period. Normally, you have to make the payments for at least 3 years. If you have crossed the lock in period, then check if surrender charges are prohibitive. Compare the surrender value to the total premium you have paid so far.
Fund Performance: If your insurance policy has a market linked investments, then check the performance of your fund. You can visit websites like www.morningstar.in and research your fund here. If your policy is expensive and if the fund is also not doing well, then it’s a Red Flag.
Special Features: Some of your insurance policies, especially ULIP, may have features that can be helpful in the long run. Some ULIPs give you loyalty bonus after 10 years. Some ULIPs may have highest NAV guaranteed plans. These do come with even higher expense structure due to the Guarantee charges but based on your investment duration, this may get you some decent returns.
Research and Advise: Do visit popular websites on personal finance like www.jagoinvestor.com and research on your policy. Financial Planners and Bloggers regularly cover leading products and give insights in to good and not so good aspects of such policies. Based on the size of your insurance portfolio, you may like to hire an independent adviser who can evaluate and guide on your policies.
Current Health: If you surrender your current policy, will you have a shortfall in your Insurance corpus? If yes, will you be able to take a new insurance policy? If you have a health situation like Diabetes or Blood Pressure, getting a new policy may be difficult.
Alternate Investments: If you surrender the policy, what will you do with the surrender money and the incremental premium that you will save every year? If that money is going to be in your 4% Savings bank account, then it may not a great idea to surrender your policy. You should use Financial Planning calculators and work out an alternate scenario in Excel with expected cash flow and maturity value in your current insurance policy Vs. alternate investment.
Research and Advise: Do visit popular websites on personal finance like www.jagoinvestor.com and research on your policy. Financial Planners and Bloggers regularly cover leading products and give insights in to good and not so good aspects of such policies. Based on the size of your insurance portfolio, you may like to hire an independent adviser who can evaluate and guide on your policies.
Current Health: If you surrender your current policy, will you have a shortfall in your Insurance corpus? If yes, will you be able to take a new insurance policy? If you have a health situation like Diabetes or Blood Pressure, getting a new policy may be difficult.
Alternate Investments: If you surrender the policy, what will you do with the surrender money and the incremental premium that you will save every year? If that money is going to be in your 4% Savings bank account, then it may not a great idea to surrender your policy. You should use Financial Planning calculators and work out an alternate scenario in Excel with expected cash flow and maturity value in your current insurance policy Vs. alternate investment.
Note: This article was written for Dainik Bhaskar and published on 31-Jan-2014. This article is freshly written but the theme is similar to one of our earlier articles available here and which was published on 8-Nov-2013 in Dainik Bhaskar.
0 Comments