Insurance is one of the most important part of your financial plan because it safeguards you and your family against various types of risks, but having the right policy in your insurance portfolio is not so easy.
We have seen many of our clients who have 10-15 policies on an average and don’t know what to do about them. Should they continue paying high premiums? Should they convert their policies into paid up or should they just surrender them?
If you are also one of the many people wondering what to do with your existing insurance policies that you might not want, don’t get disheartened. There is always a way out of everything and for your insurance policies as well we have some suggestions, which can surely help you to come out of such policies which create problems for you.
Let’s see what your options are:
- Cancellation of policy in Free look period:
Often we end up buying policies due in some part to pressure from agents and the fact that we don’t want to go through the fine print ourselves. For such cases, you have the option of going through your policy in detail in the Free Look period.
This is a grace period offered to you (policyholder) as per IRDA guidelines. If you do not find the policy’s features and benefits as per your requirement, you have the option to cancel it within the stipulated time period. this option protects you from mis-selling practices of agents.
The free look period is usually 15 days from the date of taking the policy.
In case you do not agree to the term and conditions of the policy or the benefits mentioned in the policy are not as per your requirement, you can apply for the cancellation of the policy within 15 days from the day you receive your policy documents. Some companies offer an extended free look period of up to 30 days.
You will have to fill the cancellation form stating the reason of cancellation of the policy and need to submit this form along with your original policy documents to the company within the free look period.
On receipt of your cancellation request and documents, company will proceed to cancel your policy and refund your premium. You will receive your premium net of some charges which the insurance company has spent to issue the policy like stamp duty, medical charges (if you had undergone some medical tests), proportionate risk premium charges (the time period for which risk cover has been offered to you). It would be better to read the product brochure thoroughly and have clarifications from your insurance planner before signing up for the policy. Make sure that benefits offered by the policy are in alignment with your requirement.
- Surrendering Your Existing Policy After the Free Look Period
Often, the free look period is over and then you find that the policy is not suitable for you. In such cases, you can either convert your policy to a paid up policy (in case it has a component of life insurance), or you can surrender it. If you surrender your policy any time during the policy term, you will have to bear its consequences in terms of hefty charges. These charges depend upon type of plan and company’s rules. In ULIP plans, cap has been fixed by IRDA on the maximum amount which can be deducted as surrender charges but in traditional (endowment / money back) plans there is still no clarity and upper limit on surrender charges. If surrender option is used, in most of the investment plans, you will end up losing your invested amount.
Please note that in most cases of surrendering a policy within 3 years (endowment or moneyback), there is usually no surrender value. This means that whatever premiums you have paid will be lost.
In this case, you must consider opportunity cost. Should you continue to pay your premiums for the minimum period of 3 (in some cases 5) years? This will enable you to get some percentage of your invested value back. Usually this is 30-40% of the premiums paid, excluding the first year premium.
Or should you surrender the policy immediately, and invest the premium amounts of future years (that you would have paid had you continued the policy) into return generating assets? This depends on the return you expect from the investments you will make, the amount of surrender value you would receive if you continued for the minimum period and of course your tax bracket.
Let’s see what happens in a term, endowment and moneyback policy in case of surrendering:
There is no benefit in surrendering term plan as no maturity or surrender benefit is offered on these plans. If you feel that the existing term cover is not sufficient for you and you need more life cover as per your financial liabilities, then you should go for a new policy. You can do it with the same insurance company or with another insurance company as well.
Compare the charges involved and benefits receivable on the surrender of the policy.
Check your financial requirements and benefits offered by the policy. If payments under policy are in alignment with your financial goals then you should continue with your policy. Since it is a traditional plan, it will attract hefty charges on surrender and will erode even the amount you have invested in the plan to some extent.
If you surrender your policy before completion of 5years of policy (i.e. lock-in-period), your fund value will be transferred to “Discontinued Policy Fund” and will earn a return of 3.5%p.a. You will get this amount only after completion of 5 years of policy enforcement. The amount will be paid to you after deduction of surrender charges as per the specified surrender charges table.
If you surrender your policy after completion of 5 years of policy (i.e. lock-in-period), fund value will be given to you. As per IRDA guidelines, there will be no surrender charges applicable after 5 years.
GRIEVANCE REDRESSAL PROCEDURE
If you have some complaints against insurers either in respect of your policy or claims, then you can get it resolved by following the set procedure. Policyholders who have complaints against insurers are required to first approach the Grievance/Customer Complaints Cell of the concerned insurer. If you do not receive a response from insurer(s) within a reasonable period of time or are dissatisfied with the response of the company, you may approach the Grievance Cell of the IRDA.
The complaints need to be sent to the Grievance Cell of the IRDA. The Insurance Regulatory and Development Authority (IRDA) are responsible for addressing complaints filed by policyholders. Complaints against Life and Non-life insurers are handled separately. Please note that the Grievances Cell(s) responsible for life insurance and non-life insurance are separate.
Only cases of delay/non-response regarding matters relating to policies and claims are taken up by the Cell with the insurers for speedy disposal. If the grievance is not redressed, insured are advised to approach the Insurance Ombudsmen.Only complaints from the policy holders themselves or the claimants shall be entertained.
The Cell shall not entertain complaints written on behalf of policyholders by advocates or agents or any third parties.If the communication is done over e-mail, then the plaintiffs are requested to submit complete details of the complaint as required in the registration form. Without this, the Cell will not be in a position to register the grievance.
In case the claimant is not satisfied with decision of Ombudsmen, appeal can be filed at the appropriate judicial forum like civil courts and consumer courts.You can also utilize the facility of tracking your complaints and action on the complaints made by you.For any details you can log on to www.irdaindia.org or send a mail to firstname.lastname@example.org or Dial 155255 (toll free)
Please also remember that insurance and investments should be kept separate, from a financial planning point of view.
Insurance is for protection purposes and you should buy a Term plan for that. Investments is to achieve your life goals can be done by building a well researched Mutual Fund Portfolio.