Look before you exit

Exiting an insurance policy is not just a matter of procedure. It’s equally important to know if it’s financially viable, says Vidyalaxmi

THE earliest exit option available on a life insurance policy is 15 days. It’s called the ‘free-look’ period. Some insurers have extended this period to 30 days. This is basically an option to return your policy (if you don’t like it ) and get your money back. But the problem is that unlike buying consumer products such as washing machine or weight reducing equipment, the 15 to 30-day period is too less to understand whether you have made a bad decision.
Apart from this ‘early bird’ exit option, there are three other possible ways to exit an insurance policy. They are — exit by way of policy lapse or surrender or making the policy ‘fully paid’.
As a rule, there are no exit options available during the first three years of a policy tenure. And after three years your insurance policy acquires a cash value. Insurers call that as the surrender value, which is usually around 30% of the total premiums paid after the first year. The surrender value increases as you inch closer to the maturity date of the policy. For example, if you have paid an annual premium of Rs 30,000 and want to exit in the fifth year, the surrender value will work out to Rs 45,000. That would 30% of the premiums paid for five years. Now, you will have to decide if you want to reinvest this money to make up for the losses and facilitate wealth creation by investing in other high yielding instruments. For instance, it might not be a bad idea to exit a participative pension policy (which usually maintains debt oriented portfolio) after the first five years and reinvest in an equityoriented portfolio. With an investment horizon of 10 years or more, you could get a better deal. You could also convert endowment plans to whole life plans and in the process make the policy a fully-paid one. In effect, you don’t pay any more premiums. Accordingly the insurer will lower the sum assured as the years pass by. However, in this case you get the sum assured and the bonus accrues only after the policy ends.
One word of caution here: whenever you quit from your insurance investment, you have to ensure that you have taken an adequate risk cover as a back up for the unseen contingencies.
When should you hold on?
If you have another 5 years to go for the expiry of the policy, its better to stay invested. Essentially your policy would be growing well at this stage after factoring in all the costs and other deductions. If you discontinue your policy at this stage, you can’t even generate returns and make up for the losses by investing the balance premiums elsewhere.
Tax implications
If you exit from your policy within three years from the effective date, you will have to pay off for the tax benefits you enjoyed on the previous premium payments. So before deciding to call it quits, it’s better to know how much you would lose monetarily.
The simplest way to avoid all the hassle is just read the fine print. The next time your agent tells you to sign on the dotted lines, do the due diligence. Have a look at the policy document and make sure you understand it