Not All Traditional Life Insurance Policies offer Low Returns
It is assumed that all the the traditional life insurance policies offer low return but it’s not true in all cases. If you check return for long-term (over 16 years plus) endowment policies from LIC have given 7%-8% tax-free returns on the investment.
Not All Traditional Life Insurance Policies will give you Surrender Value
While this is true for many traditional products, it is not universally correct. It depends on the policy. So read you policy document. In some policies you have to pay minumum three years policy premium before you get surrender value.
Converting your traditional policy to ‘Paid-up’
Thinking of converting your traditional policy to ‘paid-up’ in the middle of policy term; check out following points –
1- Did you know that Paid-up Value will be given at Policy Maturity or Death?
2- Have you found out that what will be the paid-up value?
3- Considering the amount of premium paid till now, how much is your rate of return?
You need to see the numbers before converting the policy to paid-up.
Taking a Loan against your Insurance Policy
Most of these products, especially endowment plans, have a loan feature wherein 90% of the surrender value can be taken as loan instead of surrendering the policy. (The current LIC rate @9%pa). Private insurers may charge a higher rate of interest on the loan. Kotak Life is charging between 12%-12.5%pa.
Taking a loan against an insurance policy is sometimes a deliberate strategy of businessmen. LIC’s Bima Bachat is a single premium endowment plan with 80C tax savings as an incentive. After taking the tax benefit, businessmen take loan on 63% of the investment @9%, which is a great feature.
Guaranteed Surrender value (GSV)
The GSV is available only after completion of at least one policy year. After completion of one year, you can take loan on 81% of the investment.
Cover Continuance feature of Old ULIPs
The ‘cover continuance’ feature was available in old ULIPs wherein you could stop paying after three premiums and continue with the policy. The funds would remain invested in your choice of fund option. The mortality charges will be deducted to maintain the insurance component. It was a great feature, but was done away with in the new ULIPs.
This was due to mis-selling by intermediaries. Using cover continuance also means you are not a long-term, disciplined investor interested in rupee-cost averaging of your investment.
Please note that the new ULIPs don’t offer this feature. In new ULIPs, if you stop paying premiums after the lock-in period, the policy will be discontinued and funds returned to you.
Use decrease in Policy Term Feature
Many LIC plans allow decrease in policy term. A policy term of 25 years may be reduced to 17 years by paying premium difference along with interest. If the policyholder does not want to pay differential premium, the SA will be appropriately reduced.” Some private insurance companies do not allow reduction of policy term. The argument is that there is not much demand for such a feature. Why can’t the policy term be extended? This is because the underwriting was done based on the circumstances prevailing at the time of policy issuance.