Yogesh is my newly added friend and recently he shared things about his surrendered insurance policy.Few months back he hired one financial planner and based on his advice he surrendered his 8 yr old ,LICs Jeevan Rekha and start investing in equity market. Though I am not financial planeer,little bit surprised by his decision as I found him of conservative nature and this plan has withdrawn by LIC (not available now for purchse).LIC Jeevan Rekha is whole life + money back policy,where premium payment term is limited but life insurance cover is for whole life (Till age of 100 Yrs) and periodic money back is till the death of policy holder.We will not enter much deeper about this plan as this post is about general precautions or things to be considered before surrendering any insurance policy.
I think,policy holder should think about following things before reaching to the decision:
- Age Of Policy:If you have purchased insurance policy before 7-8 yrs then I don’t think that its wise decision to surrender it.If it is purchased in younger age then premium paying by you is likely to be cheaper.
- Nature Of Policy Holder:Judge your risk taking nature.Few people are not comfortable with volatility of equity market.So if you are among one of them, then do not start investing in equity by surrendering your insurance policy.Invest only your risk capital in equity.
- Tax Bracket: As per current laws,survival benefits as well maturity benefits are tax free for investors.So if any one is in 30% tax bracket,effective returns are as comparative to fixed deposits.
- Insurance plans are Not comparable with equity:Two products are comparable only if all futures are comparable.We always forget to add market risk premium for equity and the risk premium needs to be added before calculating the equity returns.
- Don’t Forget To add insurance cover benefits enjoyed till date: We always forget to add benefits of insurance cover enjoyed till date.If you have added this benefit then one can certainly find improved returns.
- Policy holder can take added term insurance rather surrendering the existing policy.
- There are number of Unit Linked Insurance Plans in the market which gets cheaper and cheaper with time.Its certainly not wise decision to surrender ULIPs after completion of 5-6 years and start once again from scratch.
I am not supporter of insurance policies,but at the same its also wrong to step out of bus in between and start the journey once again .Policy surrender is an irreversible decision and if you find the decision wrong tomorrow then there is no way to reinstate it.So one should be careful and think twice before surrendering your policy.
Note:Blog Author is not related to any insurance company nor he holds any qualification related to financial planning / insurance.Opinions are personal and please avail Expert decision before taking any decision about insurance policy.
