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When Should You Terminate Your Life Insurance Policy ?

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Life insurance policies are an essential investment tool for safeguarding your family’s financial future in your absence.

There are many life insurance policies available in the market today which cater to different financial needs at various stages of life.

Term life policies, whole life policies, and ULIPs are some of the plans that you can choose from depending on the coverage and benefits.

When opting to buy a life insurance plan it is always advisable to go through the policy details thoroughly to avoid any confusions or disappointments later.

However, in case you are unhappy with your current policy, you do not have to continue with it against your will.

There are numerous ways you can exit the policy but the phase at which you discontinue the policy is crucial as it will determine whether you get any returns from the plan or not.

Exiting term plans

Term insurance plans are one of the most popular categories of life insurance policies in the market. Term plans are very cost-effective  and provide extensive coverage. However, such plans only provide death benefit if the insured dies within the policy period. If the policyholder outlives the tenure, no maturity benefit is paid out. Therefore, some customers might want to discontinue their term plan or might want to upgrade to a plan that provides additional benefits.

If you are unhappy with your current policy and want to exit it, you can simply stop paying the premiums. Term plan premiums are not one-time in nature. You must keep paying the premiums at regular intervals to keep the policy active. Therefore, by stopping the payment of premiums you can easily exit the policy with no additional cost or conditions.

If you are planning to exit your term plan because of the low coverage or lack of benefits, you can upgrade it to a traditional life insurance policy. However, only a few insurers provide this option. Upgrading your policy will give you better coverage and offer maturity benefits.

Exiting traditional life insurance policies

Traditional life insurance policies include two aspects – investment and insurance. Endowment plans and money-back  plans are an example of traditional life insurance policies. Such policies usually provide 4-6% in returns. Exiting the policy at an early stage will reduce the sum insured and you will be paid a lower amount.

Mentioned below are the various ways and stages for discontinuing a policy:

  • Initial phases of the policy: The initial phase of a policy begins when you buy the policy and continues till you complete 3 years under the plan. In the initial phase you can discontinue your Insurance plan easily, but you will not receive any benefits.
  • Free-look period: The free-look  period refers to the time period provided by the insurers to help you understand the terms and conditions of the policy better. The free-look period usually ranges from 15 days to 30 days. In the duration, you can go through the policy details and if you are dissatisfied, you can cancel the policy. Upon cancellation, the insurer  will returnthe premium amount after deductions like service charges, stamp duty, and so on. It is advisable to utilise this facility to avoid any disappointments later.

 

  • Policy lapse: If you have missed the free-look period, you can still discontinue your policy by letting the policy lapse. In the initial phases of the policy, you do not have any other option to exit the policy as the other options are available only after you have completed three years under the plan. To let the policy lapse, you will have to stop paying the policy premiums. When you let the policy lapse in the initial phase, no lump sum amount is paid out as the benefit ceases along with the policy.

 

  • Exiting policy after 3 years: Once the policy completes 3 years, you can use these methods to exit your policy:

 

  • Surrendering the policy: Surrender Value amount is calculated by the insurer. It is not the premium amount you have paid so far. The amount is based on  a surrender value factor and is always lesser than the total amount you have paid in premiums. The surrender value for the first 7 years is determined by the Insurance Regulatory and Development Authority of India (IRDAI). After the period of 7 years, the insurers determine the value. However, the amount must be cleared by the regulator. The closer you are to the maturity date, the higher your surrender value will be. For instance, the surrender value for the third year of the policy is equal to 30% of the premiums paid. If you surrender between the fourth and seventh year of the policy, the value will be 50% of the premiums paid. If you are surrendering after the seventh year of the policy, you can contact your insurer to get the surrender value as different insurers might calculate in varying ways.

 

  • Paid-up policy: If you have completed 3 years of your policy, you can stop paying the premiums to convert it into a paid-up policy. Unlike the initial phases, the policy won’t lapse if you discontinue paying the premiums. With a paid-up policy you will get returns. In a paid-up policy, the sum assured will reduce and will be called the paid-up sum. The benefits of the policy will continue; however, you will only receive the pay-out at the policy’s original maturity date. The paid-up sum assured is calculated in the following way:

Paid-up sum assured = Sum Assured x (Total number of premiums paid/Total number of premiums payable)

When the policy matures, the sum assured along with the bonus already added to the policy will be paid to the insured. If  the life insured dies before the maturity date, then either the paid-up sum assured or 105% of the premium (whichever  is higher) is paid to the beneficiary.

Conclusion

Investing in a life insurance plan can provide many benefits. Apart from life cover and maturity benefits, premiums paid for life insurance policies are exempt from taxes. Therefore, it is important to think thoroughly before surrendering or exiting a policy. Even if you choose to discontinue your current insurance policy, make sure you have adequate coverage from another plan or invest in one if you don’t.