Articles

There are wiser ways to cope with the burden of an insurance policy that you may have bought without a thought

It is that time of the year when money flows from your wallet like water. The reason could be last-minute investments to save on taxes just before the financial year ends or holidaying with the family during a Christmas break or a simple year-end gettogether. Even as you are caught in the flurry of fast-paced events that ring in the excitement of the New Year, you suddenly remember an insurance policy that you bought a few years ago to claim tax breaks under Section 80C. Well, you are not alone. There are many who are stuck with bought-on-the-spur-of-the-moment policies. "When a policyholder buys insurance just to save tax or under obligation, many times he or she doesn't pay the subsequent premiums. Also, if the policy is mis-sold by an agent and the policyholder is not satisfied with the terms and conditions of the policy, he/she may call it quits," says Pankaj Mathpal, managing director Optima Money Managers.

Sure, the policy could be a cause for regret and a financial burden, or just not worth it. But, the thousand-dollar question is: Should you pay the premium when the policy comes up for renewal by the end of the month?

The Doctrine Of Lapse:

There is no standard definition or time period within which the insurance policy lapses. It varies from company to company and from policy to policy. Moreover, there are various stages before the policy dies a natural death. Rahul Aggarwal, CEO, Optima Insurance Brokers & CEO, click2insure.in, says, "If a policy has a grace period of 40 days, you would still be covered under that policy up to 40 days provided you pay the premium within that period. After the grace period of 40 days, you can still pay the premium, but you are not covered by the policy anymore. This number varies from policy to policy but the maximum time period within which you can revive the policy can extend up to one year." But you have to pay a penalty interest and other fees to give new life to that policy.

Mathpal adds, "A policyholder can revive his lapsed policy by paying all arrears on the premium with interest within five years from the date of the first unpaid premium (FUP). The insurer may ask the policyholder to submit his health status in a prescribed form or may ask to undergo the medical tests to assess the risk." In fact, LIC has been organising policy-revival campaigns on a regular basis for years now. Any policyholder can revive his/her policy during the two weeks of the campaign without paying the revival fees.

Should You Let The Policy Go... :

The agent had been following up till you handed out the first premium cheque to him. Once he pocketed his handsome commission, you don't require a Sherlock Holmes to discover the reason behind his absence. Now, it is your headache to remember the dates and pay the premiums on time to keep the policy alive. First things first - register for email and SMS alerts. Apart from the sheer convenience, constant SMS alerts and bombarding of email alerts will help you keep the premium date in sight. If it is just a temporary cashflow issue, link it to your credit card by opting for an auto-pay facility. The insurer will directly debit the premium amount from your credit card and add it to the next billing cycle.

...Or Should You Revive It?:

This solely depends upon the nature of the policy. But Aggarwal says it is always better to revive/renew the policy than buy a new one as the entire pricing of the policy is based on the age factor. "If you are buying an insurance policy now at the age of 35, the premiums would be higher. Also, you have to wait for a longer time to enjoy the benefits of the policy. In case of a Ulip, for instance, you have to pay premiums for another five years and then wait for another five years to be able to enjoy benefits. Similarly, in case of endowment plans, you will realise the benefits much later than your earlier policy. Hence, it always makes sense to pay the penalty and renew the old policy."

However, it does not make sense to revive term insurance cover. "A term cover does not acquire any paid-up value or accumulate any re-turns as it is not investmentoriented in nature. It only makes sense to revive investment oriented policies after working out the cost benefit analysis," says Harsh Roongta, CEO, ApnaPaisa.com. Similarly, there were some fixed return products, which offered tax free returns over a period of time to the policyholder. You should continue paying the premium on such products too, Roongta adds.

When To Hold On?:

"Even now the cost structure of a Ulip is such that it adds to your gains only from the ninth year. After paying a hefty premium year after year for five years, it does not make sense to quit at this stage. Even after nine years, if the policy does not generate good returns you can stop paying the premium and let the Ulip slip into the auto-recover mode," Aggarwal adds. A Ulip has two buckets, namely, the risk and investment bucket. Once you stop paying the premium (allowed only after five years), the insurer shifts the money from investment bucket to risk bucket. This transfer of funds keeps happening till the investment component is siphoned off. But if you have another five years to go for the expiry of the policy, it is better to stay invested. Essentially, your policy will be growing well at this stage after factoring in all the costs and other deductions. Now, if you discontinue your policy, you will not be able to generate returns and make up for the losses by investing the balance premiums elsewhere.

The Tax Axe:

If you exit from your policy within three years from the effective date, then you will have to pay off the tax benefits that you enjoyed on previous premium payments. So, before deciding to call it quits, it is better you know how much you will 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 marked spots, resist from taking the easy way out. Read the document before you sign off a few thousands of rupees in favour of the insurer. Otherwise, you will have no one but yourself to blame since there is no recourse available after the free-look period, which spans in the range of 15-30 days. If you decide to quit half way, it may very well turn out to be an expensive affair.

COVER-STRUCK

* If you want to continue a policy, set email or SMS alerts which will inform you 7-15 days before the due date for paying the premium

* You can also opt for ECS from your savings account or auto pay facility from your credit card. It will be added to your credit card bill

* If you can't afford an annual payment, opt for a monthly or quarterly payment.

* Monthly/quarterly payments will be slightly expensive but are easier on your pocket

* Most insurance policies offer a 30-day grace period. In case of monthly-premium paying mode, the duration is 15 days

* Do some cost-benefit analysis before deciding to revive the policy With policies maturing in five years or less, continue till the policy term ends because of higher premium outgo, especially in case of Ulips .

Source : http://epaper.timesofindia.com/