Exit Strategies for mis-sold insurance policies

We at TFL, are working constantly on Investor Education and following different ways and means through which our message could be reached to as many people as possible.

Blog, Seminars are few of the ways through which we started Financial Literacy. From January 2010, we have come up with aJOURNAL which will be a quarterly edition wherein we have used print media to endorse Financial Literacy.

The First news letter was based on Insurance as we found that Indian Investor makes his Maximum mistakes while taking Life Insurance. Topics covered were:
• बीमा एक खर्चा है न कि निवेश
• टर्म प्लान
• Your Insurance agent is mis-selling if…
• Do’s & Don’ts in Personal Finance

The News letter was appreciated by all who read it and there came questions that WHAT SHOULD WE DO WITH OUR EXISTING INVESTMENT BASED INSURANCE POLICIES.

Due to mis-selling of Insurance; more than 91 Lakh policies worth Rs 1000 Crore lapsed in 2009. A policy is considered lapsed when the premium is not paid within 60 days of the due date.
If possible we should try for exit policy rather than getting it lapsed. Let’s check out some of the exit strategies.

Before checking strategies lets understand two terms PAID UP and SURRENDER VALUE.

What is meant by PAID UP?

When you stop paying premium but do not withdraw the money from the Insurance company, the company reduces all your benefits proportionality. The benefits like SUM ASSURED, MATURITY VALUE etc. But in case of Endowment & Money Back Plans Insurance Amount ceases to exist.  You do not lose anything by this approach. For example, if your policy is for 10 years with SUM ASSURED of Rs. 2 lacs and you have paid premium for 5 years, your SUM ASSURED will now be 1 lac only and other benefits will also reduce by 50% as you have paid 50% of the overall amount that your were supposed to pay.

After making the policy PAID UP, you may choose to redeem the amount or continue with the insurance without further paying of Premium.

In case you were to redeem the policy, you get the amount as per SURRENDER VALUE.

Now what is meant by Surrender Value?

Surrender value is the amount that Insurance company will give you in case you were to withdraw policy before its maturity date based on their pre-decided calculation. For the first 3 years, the Surrender Value is NIL or very low. As the time increases, this amount keeps going up.

Typically, Insurance Policy people have either ENDOWMENT, MONEY BACK, ULIPs or Pension Plans.

If you have taken ENDOWMENT OR MONEY BACK POLICY(Traditional Policies)

• After First Year premium, we suggest that you should stop paying further premium. You would lose all you have paid, but it is better to stop travelling on wrong road once you know it.
• If you have paid 2 years premium, we suggest that you should pay one more installment and the stop paying premium. By doing that, you will actually make this policy PAID UP.
• If you have paid the premium for more than 3 years, we suggest that you should stop paying further premium and get this policy into PAID UP ZONE until you get reasonable value.

Tax treatment: The entire surrender value added to your income in the year of receipt.

If you have taken ULIPs.

One of the most mis-sold policy is ULIPs. It is a combination of MUTUAL FUND and TERM INSURANCE prefixed by HUGE CHARGES.

• After First Year premium: ULIPs are very expensive product and bit tricky in its calculation. The expense varies anywhere from 20% to 70% of first years premium. Do check the same and if you find those heavy expenses, say thanks to your Agent & get your insurance bond laminated so that not only you but others also don’t make such financial blunders in life.
• If you have paid 2 years premium, do pay 3rd year premium as well – NO CHOICE
• If you have paid the premium for more than 3 years: Whether you should withdraw or hold that investment is based on Alternative Opportunity you have at that point in time. If you find that you will be better off investing in Mutual Fund directly instead of remaining Invested in ULIP, then its better to withdraw the same and make Mutual fund investment. Now this statement applies to all your investment.

Tax treatment: Nil tax liability if withdrawn after 5 years but between 3-5 years if you surrender it then entire surrender value gets added to his income in the year of receipt (in this case, you can withdraw 99% of the fund value). Also check surrender charges before you make such decision.

How to exit from tension policy, by the way people still call it pension policy:The decision to hold or redeem is based on similar lines as Traditional Policy and ULIPS.

Tax treatment: The withdrawal from Pension Policy is always added to your income whether you do it before the maturity or when you get annuities.

The illiterates of the 21st century will not be those who cannot read and write but those who cannot LEARN, UNLEARN and RELEARN – Alvin Toffler

If you have made mistakes by taking BAD policies, we would say that learn from past experience and get rid of your Insurance Agents who pretends to be your friend. Always remember that Insurance and Investment are best bet only if they are not served as Cocktail.