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How To Avoid Losses From Surrendering Life Policy

Adhil Shetty



The persistency ratio (PR) is the percentage of all the policies renewed annually by consumers. In 2015-16, the PR for India’s life insurance industry stood at a paltry 61% in the 13th month. In a layman’s terms, this means that out of 100 policy holders, only 61 choose to renew their life policies after one year. The 61st month PR is worse: here, nearly two-thirds of all policy holder drop off. It means that those life policies have been either surrendered or not renewed. This is a matter of concern due to many reasons.

Why Is This A Concern?

Life insurance is an essential financial product. Beyond the tax savings and investment benefits for you, a life insurance policy is your family’s lifeline in case you died. Therefore, coverage should be maintained at all times if you are a person with financial dependents. Secondly, if you surrender a policy now and buy one later, it means that you’ll end up paying a higher premium. This is because the premium is linked to your age. The older you are while buying the policy, the more it will cost you. Therefore, you should do due diligence for your policy purchase, and stick to your policy for the long-term once you’ve purchased it.

Avoid Mixing Insurance & Investment

One of the traditional ways of investing in India has been through insurance policies – endowment plans, cashback plans, ULIPs, etc. Often, you surrender your policy because you need the proceeds for urgent reasons like buying a house or your child’s wedding. By surrendering the policy, you put your family at financial risk. It’s better to maintain the policy and fulfil your money needs through planned investments. If you absolutely must surrender the policy, ensure that you have a back-up life cover. For best results, avoid mixing investment and insurance. If you foresee an emergency money need, create an emergency fund using fixed deposits. Invest through open-ended mutual funds which can be redeemed without difficulty at any point during the investment.

Buy Term Insurance

If you are a person with financial dependents, you need to buy life insurance. The best, cheapest and simplest way to insure your life is buying a term insurance plan. This is a pure life cover with no investment benefit. In comparison with insurance plans that also offer investment benefits, a term plan is cheaper. For example, the annual premium for a term plan of Rs. 1 crore for a 30-year-old person can be as low as Rs. 7497. A term insurance policy has no surrender value. It only has a death benefit apart from any riders it may have. To discontinue a term plan, simply stop paying your premium.

Invest As Per A Goal

Always set a goal for any investment. This allows you to set a time line, have a returns expectation, and pick the right investment tool to achieve that goal. This would protect you against situations when you redeem or surrender an investment for any need. Also, this would allow you to keep your life insurance policy because you have created investments to meet all your other money goals.

Use Free Look Period

Every life insurance policy has a free-look period wherein a policy can be returned to the insurer if you feel it is not what was advertised or if it doesn’t meet your requirements. You need to do this within 15 to 30 days as advertised in the policy.

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