Most people do not realise the importance of Life Insurance and buy a policy mainly for tax saving benefits. In most cases parents purchased a policy for their children and the children continued paying the premiums after they start earning.
In this article we want to highlight the importance of Life Insurance but before that, let’s start by understanding some basic concepts of Life Insurance.
Some Important Terms to note:
1. The Surrender Value of a Policy
Surrender value of a policy is what a life insurance policy is worth at a given point in time. This is the amount you get at the time of stopping your policy. In most traditional policies there is no surrender value for the first 3 years.
For e.g. If you have a 20 year policy and surrender it in the 10th year, then the surrender value is approximately around 60-70% of the premiums paid, however if you were to surrender the policy in its 5th year then the surrender value is reduced and you would get around 25-30%.
In the later part of the duration, you might receive the bonus as well. Remember, when you try to surrender your policy, you might face stiff resistance from the agent or the company.
2. Paid Up Policy
If you do not want to surrender your policy and take the money right now, the best option would be to make the policy paid up. In this case you will get the premiums plus bonus accrued at the end of the policy maturity. In this way, you save on money going out of your pocket and get the money at maturity.
Many traditional policies announce yearly bonuses at the end of each year which keeps accumulating and is given to you at the end of the maturity period.
For e.g. If the policy declares a bonus of Rs 40 for every Rs 1000 of the sum assured and your sum assured is Rs 10 lakhs, then your bonus amount will be Rs 40,000/-(4%) but you would receive this amount only at the end of the maturity period. So if you have a 20 year policy then would receive Rs 8,00,000/- as the bonus amount along with the sum assured at the end of the maturity period. Some policies will give extra bonuses as a loyalty booster.
So at the end of the policy maturity, you will get your sum assured +bonus (depending upon the policy). The bonus will be an indicative number, check your policy details to understand the indicative maturity value of your policy.
The next step is to ask yourself these important questions:
a. How may polices?
Remember 1 or 2 life insurance policies will do the same thing that 10 or 15 life policies will do. It is ideal to focus on the life cover amount and not on the number of policies. Less number of polices will lead to less paperwork and trouble.
b. Have you bought the policy for life cover or for investment purpose?
Remember most of the traditional policies do not give you an ideal life insurance cover nor do they provide you with a desirable rate of return. So in this case analyse the advantages and disadvantages of continuing with the policy and take a decision that will better your future.