"If I outlive the policy term, I must get something in return for all the premiums that I paid", is a typical mindset. Knowing the pulse of the market, insurers have been attracting people to buy endowment and money-back policies for years. However, in the last decade, another category of insurance, Unit Linked Insurance Plans (ULIPs) garnered crore of rupees. Some insurance agents marketed ULIPs as a substitute to mutual funds providing life insurance benefits, while others pitched them as an innovative product giving policy holders immense flexibility. Mis-selling happened to such an extent that 15-year plans were sold as 3-year premium paying plans, while the fact was the minimum premium paying term was 3 years.

What are the consequences?
Investors are disappointed as they are not seeing any return on their ULIPs even after holding it for longer term say 5-6 years. They are pulling out money fast. Year after year, the value of insurance policies surrendered is going up. The proportion of ULIPs in total surrendered policies has always remained very high. Private insurers are seeing higher cases of surrendered policies.
 

Opting out...

(Source: IRDA, PersonalFN Research)  

Are range-bound markets to be blamed?
True, markets haven't generated attractive returns over last 5-6 years but that can't be an excuse for unprecedented rise in cases of surrendering. It is mis-selling by intermediaries and misinterpretation of policies by investors has to be blamed. PersonalFN is of the view that, insurance policies are meant to cover financial losses a family might suffer in absence of its breadwinner. At its core, profit is not the motive of insurance. But due to the mindset of potential buyers described above, takers of insurance in its purest form are minimal.

What should you do now?
Life insurance is a long term contract and thus terminating it abruptly may have serious financial implications. Therefore, before you surrender your policy, you must consider all aspects associated with it. Below given are among few points you may like to consider,

Surrender charges: If you want to terminate the policy, it is obvious that insurance company will try to discourage you. So, there will be surrender charges. Before you decide upon whether to exit or continue with the policy, you must understand how much you may have to forgo in case you want to cancel your policy. Usually in ULIPs, surrender charge will be nil after 5 years while those in traditional plans, would defer. Your attempt should be to minimise your losses while surrendering

Performance of old policies...
Performance is a crucial factor especially in case of ULIPs. If the underlying fund is beating most of the leading diversified mutual funds and majority of charges are already deducted, you may be better off staying with the policy. But if the underlying fund is not doing well, you may surrender the policy and invest proceeds in a consistently performing diversified mutual fund. Since traditional plans are not market linked, they do not have any Net Asset Value (NAV) and thus their performance can't really be measured. But you can always find out the accrued bonuses on your policy and then decide your further course of action. PersonalFN recommends, if only few years are remaining before policy matures, it would be disadvantageous for you to surrender your policy.

Possibility of re-insurability
You might have done a few mistakes and have bought insurance policies that you may have never required. Nonetheless, you are atleast partially insured. If you now want to get rid of all of those policies and buy a term plan; you must make sure that you are still fit and don't have any physical ailment that would discourage insurer from providing you a fresh cover. Sometimes, it may prove beneficial to carry over existing policies despite knowing that they are not performing well.

PersonalFN is of the view that, investors may continue to surrender policies even in future. Until, the mindset of getting "something in return" doesn't change, the marketing gimmicks of insurers and those of their agents may continue to attract investors to endowment plans and ULIPs. Commission has always been a big motivational factor behind the sale of insurance policies. Earlier, when ULIPs were paying higher commissions, your agent must be telling you the benefits of investing in market linked policies. But now that, commissions on ULIPs have been slashed; you don't get to hear about ULIPs from him. Insurance Regulatory and Development Authority (IRDA) released new rules for life insurers recently, addressing some key issues pertaining to commissions and surrender value. Before, these rules became applicable, insurance agents tried to hard push old insurance policies to make a killing. Unless this stops, investors may continue to terminate their policies. PersonalFN gives you 3 golden rules to avoid being in a situation where you lose if you surrender and still lose even if you don't.

Here are they...

1. Don't buy something that your financial plan don't allow you to buy
2. Identify how much cover you need to get yourself insured with
3. Buy insurance in its purest form, i.e. buy term insurance policies
    

Investors who are surrendering policies now are those who didn't assessed their risk appetite before investing in ULIPs. On the other hand, people who are forced to surrender traditional plans are those who don't plan their cash flows and often buy too many policies for too little of insurance cover. In both situations, only the policyholder suffers. Adopting the financial planning approach helps you avoid financial blunders.

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