Expert advice

Jul 15, 2013,13.44 IST

Want to discontinue your life insurance policy? Here's help

Every insurance policy has 15 working day free-look period and within this period, if he is not satisfied with the policy benefits one can return the policy back to the insurance company and the insurance company is bound to give the full refund of the premiums that has been paid subject to a couple of deductions, personal finance expert, Harshvardhan Roongta, Roongta Securities said.

In an interview to CNBC-TV18, Harshvardhan Roongta of Roongta Securities gave few options to discontinue a life insurance policy. 

Also Read: Here's why one should not mix investment and insurance

Below is the verbatim transcript of Roongta's interview with CNBC-TV18.

Q: After one has bought a life insurance policy and if he realise that he do not want to continue with the same then what are the options? 

A: Some time people realise that the policy that they have got in their hand is not what was explained to them or it's not what they have understood and some people who have bought policies about five-ten years ago realise that now they do not want to continue with these policies. So, one needs to understand the options clearly before signing the proposal, because life insurance contracts are long-term in nature and there are lots of restrictions at the time of withdrawal during the policy term. Let me take it on a case to case basis: 

(1) If a person who has bought a fresh policy and the document has been delivered to him. Every insurance policy has a clause of 15 working day free-look period and within this free-look period he can return the policy back to the insurance company and the insurance company is bound to give the full refund of the premiums that has been paid subject to a couple of deductions like stamp duty that has been paid on the policy, the cost of medical test which the company has incurred and the premium for the number of days he has been provided cover with. In case of a unit linked insurance policies (ULIP) policy the net asset value ( NAV ) as on date of returning the policy is to be paid minus all the expenses. So, this is in case one has bought a fresh policy and the document has just landed in his hand. 

(2) If one has a traditional policy bought prior 1st January 2014. In traditional policies, one has to pay premium for at least three years. If one haven’t paid premiums for three years, all the money that has been paid gets forfeited and nothing comes at a time of closing the policy. In case premiums have been paid for more than three years then there are two options available; (a) stop paying any further premium to the policy. The benefits that have been accrued in the policy gets freezed as on that date and the payout happens when the original maturity was scheduled to be, for example he had a policy for 20 years, paid premiums for five years and then stopped making any premium payments but all the benefits accrued from five years will be kept as it is and given at the end of 20 years. In case he do not want to wait for that number of years then there is an option to surrender policy back to the company and the company after deducting certain charges, which are pretty heavy in nature in terms of charges, however he gets the money in hand immediately. Find out: Differences between financial planners and agents 

(3) Talking about united linked insurance policies. If a person has bought a policy before September 1, 2010 then he can go back to the insurance company, ask for surrendering the policy and the company based on the current NAV minus the surrender charges will refund the money straight in hand. In case if the policy has been bought after September 1, 2010 then there a minimum locking period of five years. So, one can stop making the premium payment and even if he has made just one premium payment then he does not have to make a payment for five years. The money gets transferred into the policy discontinuation fund and the insurance company is entitled to deduct maximum of Rs 6,000 from that fund. The balance amount will remain in the policy discontinuation fund and be given at the end of five years, which is a minimum lock-in period. In the interim period one gets an interest at the rate of what the savings bank account holder of a State Bank of India  gets, which his currently 4 percent. Therefore, these are the couple of options available in case an investor or a policyholder feels that he is stuck with a policy which he does not want to continue.   

Q: When you spoke about surrendering or making a policy fully paid up, are you referring to only a term policy or are you referring to whole life and endowment policies? Is this option available in a term policy? A: In a pure term policy there are no benefits to be paid out at the end of the period. So, let us assume a person has taken a term policy and after five years he is getting another option, which is cheaper and possibly he doesn't want to continue with the company which he already has a term cover with, he simply stops making the payment. The policy terminates because the benefits that accrue in the pure term policy are only for one year. So, if one pays the premium, he is covered. If one does not pay the premium the policy terminates on its own.

Caller Q: Want to invest in LIC policy for tax saving purpose, please suggest? 

A:Tax saving is just one of the benefits that insurance policies offer. If you wish to save tax then there are other options under which you can invest and generate good returns. I could recommend a Public Provident Fund (PPF) for that instance to you, I can recommend national saving certificates, bank fix deposits, which are eligible for tax deductions. You should invest into those areas and try and gain tax benefits as well as get returns which are higher than life insurance policies. Also the tax benefit that you can get under 80C is only Rs 1 lakh. So, the Rs 2 lakh that you wish to invest, you need to make sure that Rs 1 lakh you will be eligible, rest there are other sections if you haven't taken the benefit of investing in direct equities earlier, you can use the Rajiv Gandhi Equity Savings Scheme (RGESS)., You can look  at Portfolio Mix of life insurance, equity schemes, PPF, NSC, etc based on your risk profile. That would be better for you.


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