If you have an insurance policy that you think you do not need anymore, or you bought a policy that is not suitable for you, or took it just to save tax, you need not get stuck with the same for the entire tenure. Most insurance policies come with some exit options, although with some cost. Here we attempted to help with information on how to exit insurance policies, which are not necessary.
You can withdraw an insurance policy at different levels after making the purchase. Below are the phases of the policy that offers exit option.
The Free Look Period: The free look period is the earliest exit option mandated by the IRDA. A policyholder is entitled for the free look period for 15days from the receipt of the purchase. The period allows the policyholder to rethink over the purchase and return it to the insurance company, if not happy.
If a policy is returned during the free look period, the premium amount is returned by the insurance company, after deduction towards the stamp duty, medical tests and service charges.
Allow Policy Lapse: Another easy way to exit a policy during the initial years is to let the policy lapse. If the policyholder stops paying the premiums, the policy lapses.
If a policy gets lapsed, the policyholder would not receive anything. All the paid premiums are lost. Term plans does not come with exit option. Thus, if you do not need it, let them lapse.
Surrendering The Policy: Three years after the purchase of a policy, insurance companies offer exit options. Policy surrender is one such option, which is a voluntary surrender before the maturity.
If the policy surrender is made by the policyholder, a lump sum is paid by the insurance company as per the surrender value or cash value. Below are more details about surrender value:
A part of regular premiums go towards the investments and the rest towards the life cover.
- The invested part accumulate as cash value as the policy continues.
- This accumulated cash is paid out to the policyholder on surrender.
- The cash value keeps accumulating as the policy continues.
- As the policy moves closer to maturity, the cash value increases.
Let It Paid Up: Another alternative for the surrender is to make it paid up. A paid-up policy allows the policyholder to discontinue the premium payments. The policy continues but the sum assured reduces, which is known as the paid-up value. However, the policyholder will no longer be entitled for additional benefits, dividends or future bonuses attached to the policy. Bonuses accrued during the first three years would be paid to the policyholder upon maturity.
Insurance policies are rewarding as the years pass on. If only a few years are left for maturity, it would be wise to hold on the policy than to surrender. However, if you plan to surrender the existing policy and reinvest else where, ensure to choose vehicles that offer superior returns and the ability to recover the loss. Mutual fund investments in a well-diversified portfolio offer better returns based on several factors like the tenure, amount, type of fund, etc. Take well-informed decisions with expert advice from professionals like ArthaYantra. We work with a mission to make high quality financial advice affordable to everyone, irrespective of their wealth status. Have a great financial journey.