When You Must Terminate Life Insurance Policy?

7-June-2021 |

Whether a person has purchased a life insurance policy last week or several decades ago, at some point, he or she may decide that the policy is no longer useful. He/she may not wish to continue it. There are several reasons why a person would come to this conclusion. It could be that the insured person no longer needs it or that the premium payments are too high for him/her. Whatever the reason, there are several easy ways to cancel a life insurance policy.

However, you must know what happens when an insured person cancels or exits a life insurance policy. Also, as the first step, you must know how to do it without losing your hard-earned money.


Terminating a life insurance policy:

When buying the right life insurance policy, many buyers often get confused as several options are available and end up buying the wrong policy. Some insurance agents mislead people for their benefit, and one may buy the wrong life insurance policy. However, it is not necessary to continue with an inappropriate policy.

If the policyholder believes that the insurance policy in question is not right for him or her, there is no point sticking to the plan for the entire tenure. Almost all the life insurance policies available in the market come with an exit option, which can be exercised if the policyholder wants to discontinue the policy. There is no specific age of exiting a life insurance policy, but some policyholders cancel their policies when they are older.

 

There are multiple phases of exiting a life insurance policy. The life insurance policies can be discontinued in the initial phase or after three years of the plan.


 

a). Exiting in the initial phase:

In the initial phase, after purchasing a life insurance policy, the policyholder can exit the plan via two options.


i.) Free-look period: The free-look period is the earliest option provided by the insurance company to the policyholders to exit the scheme if the buyer does not feel confident about the plan. Insurance companies usually give 15 days to the insured to exit the policy if he or she is not satisfied with the terms and conditions of the policy. In this case, the premium of the insurance policy is returned to the insured by the insurance company. However, the insurance company may deduct certain charges from the amount that includes the stamp duty, service charges, and the cost of medical tests.



ii.) Let the policy lapse: If the policyholder wants to cancel the policy after the free-look period, the only option for him or her is to let the policy lapse. Otherwise, the insured must wait for three years to exit the plan, the mandatory lock-in period for term insurance policies.

For the policy to lapse, all one needs to do is stop paying premiums. This will result in the policy lapsing. However, one must remember that lapsing a policy will void the plan’s benefits, and the policyholder will lose insurance cover and all the premium paid to date.


b.) Exiting after three years:

Once the policyholder completes the mandatory three years of the lock-in period after paying the premium, the insurance company marks the plan open for exit. One can exit the policy through two options.


i.) Policy surrender: Surrendering a policy is an option after three years of the mandatory lock-in period are over. This is a voluntary termination opportunity for the policyholder before the plan’s maturity. While the insured policyholder surrenders the policy, a lump sum amount is paid back to him or her as the cash value or surrender value. However, the insurance company deducts an amount as penalty charges.

 

The amount returned as the surrender value depends on the continuity of premium paid for the three years. The accumulated premium amount is paid back to the policyholder on surrendering the policy. Usually, 30% of the guaranteed# surrender value is paid back to the policyholder if he or she surrenders the plan after the completion of three years.


ii.) Convert it to a paid-up policy: The insurance policyholder can convert the endowment policy into a paid-up policy instead of completely surrendering it. In paid-up insurance policies, even if the insured person stops paying premiums, the policy does not lapse but continues to provide insurance cover with a reduced sum assured. However, once an endowment plan is converted into a paid-up policy, all the add-on benefits, future bonuses2, and dividends attached with the endowment plan are lost. The bonuses acquired during the first three years of the policy are not lost, and these are paid to the insurance holder after the maturity of the plan.

 

Should one terminate a life insurance policy?

 

Terminating a life insurance policy is not always advisable, as they come with certain benefits. Life insurance policies, especially the Unit Linked Insurance Plans or ULIPs3, are more beneficial for policyholders in the long term, as the insured persons can easily recover the policy expenses by the end of the policy tenure.


However, an insured person should understand that life insurance policies are products like any other that he or she is buying. Hence, he or she is entitled to get the best value for money. Therefore, if the insured does not feel satisfied with the policy terms and conditions or the returns he or she will receive on maturity, the insured can terminate the policy. He or she can then opt for any of the ways mentioned above to exit the policy.

 

A policyholder can cancel the insurance plan and opt for a better plan that suits his requirement and provides higher returns. Also, he or she can opt for other investment plans to reinvest the money. Before you decide to exit the policy, understand the pros and cons.



L&C/Advt/2021/Jun/0775


Disclaimer

  • Buying a Life Insurance policy is a long-term commitment. An early termination of the policy usually involves high costs and the Surrender Value payable may be less than the all the Premiums Paid.

  • #Guaranteed Returns/Payouts depend on Plan Option, Policy Term, Premium Payment Term and Age at entry

  • 2These bonuses are not guaranteed in nature. The Company may declare Cash Bonus rate annually in advance. The Cash Bonuses if declared, will be applicable provided all due premiums have been paid.

  • 3IN THIS POLICY, THE INVESTMENT RISK IN INVESTMENT PORTFOLIO IS BORNE BY THE POLICYHOLDER. THE LINKED INSURANCE PRODUCT DO NOT OFFER ANY LIQUIDITY DURING THE FIRST FIVE YEARS OF THE CONTRACT. THE POLICY HOLDER WILL NOT BE ABLE TO SURRENDER/WITHDRAW THE MONIES INVESTED IN LINKED INSURANCE PRODUCTS COMPLETELY OR PARTIALLY TILL THE END OF THE FIFTH YEAR. Past performance is not indicative of future performance.

  • All investments made by the Company are subject to market risks. The Company does not guarantee any assured returns. The investment income and price may go down as well as up depending on several factors influencing the market.

  • Please make your own independent decision after consulting your financial or other professional advisor

  • Insurance cover is available under the product.

  • The products are underwritten by Tata AIA Life Insurance Company Ltd.

  • The plans are not a guaranteed issuance plan and it will be subject to Company’s underwriting and acceptance.

  • For more details on risk factors, terms and conditions please read sales brochure carefully before concluding a sale.

  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.

  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.