Personal Finance

How to discontinue your life insurance policy

Rajalakshmi Nirmal | Updated on November 04, 2019 Published on November 04, 2019

Exit your policy only after you buy another life insurance cover.   -  courtneyk

Exit your policy only after you buy another life insurance cover   -  istock.com/Pattanaphong Khuankaew

Converting it into a ‘paid-up’ policy lets you enjoy life cover even after stopping premium payment

Did you buy insurance on the persuasion of a niggling neighbour who is an insurance agent and now want to discontinue it? Well, you can do that, but it is better to convert it into a ‘paid-up’ policy rather than stopping premium payment and letting the policy lapse.

In endowment plans (insurance plans that come with a saving component and return a lumpsum on the policyholder surviving the term), if you want to discontinue before end of the term, there are two options – converting it into a paid-up policy and continuing to enjoy the risk cover, or surrendering and completely exiting the policy.

Here, we explain both options and the pros and cons:

Paid-up policy

A paid-up policy lets you enjoy the cover from insurance even after you stop paying premium. It will pay the sum assured on death to your nominee and if you survive the term, you will be eligible to receive the maturity proceeds at the end of the term.

However, note that when a policy becomes paid-up, benefits reduce. The maturity proceed (as also death SA) will be reduced by multiplying it with the ratio of the premiums paid to the premiums payable under the policy. The bonus accumulated will be paid at the end of the policy term, but will be proportionately reduced. Also, no fresh accumulation of bonus will happen from the time the policy becomes paid-up.

Till recently, to convert your policy into a paid-up policy, you should have paid premium for a minimum number of years, says a HDFC Life spokesperson.

In case where the premium payment term is less than 10 years, you should have paid at least two full years’ premium; in case where the premium payment term is 10 years or more, you should have paid premium for at least three years.

Good news is that in the IRDAI’s Non-Linked Insurance Products Regulations, 2019, recently, the minimum number of premium payment required to be done for a policy to be eligible to be converted into paid-up policy has been reduced to two years for all plans irrespective of the premium payment term.

A unit-linked insurance plan (ULIP), which is a type of endowment insurance, can also be converted into paid-up policy. Here, policyholders, however, need to have stayed put for the entire lock-in period of five years to be eligible to convert it into a paid-up policy. Note that in case of ULIPs even after the policy becomes paid-up as the fund continues to remain invested, charges such as fund management charge will continue to be levied. (In non-linked plans, there is no charge deduction once policy becomes paid-up).

Surrender

If you don’t like to stay with the policy, you can surrender it. Once a policy is surrendered, it terminates. The life cover and other benefits from the policy cease with immediate effect.

In case of surrender too, however, you should have paid premium for a minimum number of years, says Akshay Vaidya, Business Head, Term Insurance, Policybazaar.com.

In ULIPs, it is five years. On surrender, any time after five years, the fund value is paid out and there is no charge for pre-mature exit. In non-linked plans (traditional life insurance), surrender is allowed after two years. Surrender charges are heavy. IRDAI specifies the minimum surrender value that insurers should pay their policyholders. However, there is still a loss of at least 50-70 per cent of premium if policy is surrendered in the initial years.

The guaranteed surrender value when a non-linked policy is surrendered in the second year is 30 per cent of the total premiums paid (minus survival benefits already paid); if surrendered during the third year of the policy, it is 35 per cent of the total premiums paid (minus the survival benefits paid). So, know that you will be pinched hard if you surrender the policy in the initial years. While the surrender value for the initial seven years is fixed by the Insurance Regulatory and Development Authority of India (IRDAI), from the seventh year, it is what the insurer decides, though, it has to get clearance from IRDAI.

What you should do

Once you sign up for an endowment policy, you need to pay premium for at least two years to come out of it without much damage.

Exit before two years, especially in savings cum insurance plans such as money-back policies, will cost you dear. So once invested, pay premium for at least two years, otherwise, you will not have the option to make it paid-up or surrender it, and end up burning a big hole in your pocket.

On the choice between surrender and conversion into a paid-up policy, the latter is better, as you get to benefit from continuity of life cover (provided you are not in urgency for money and can wait till the end of policy).

However, be it either in case of surrender or conversion of existing policy into a paid-up policy, make sure that you do not have a break in cover. Exit your policy only after you buy another life insurance cover.

Published on November 04, 2019
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