There are many reasons where one may want to cancel the life insurance policy. Some ideas make good sense, and some don’t. In several instances, the buyer gets so confused and end up buying the policy that is of no use to him/her.
Sometimes even the sales persons play the trick on the mind of the buyer because of their hidden motives. Whatever the reason may be, good or bad, you can always make your way out from unwanted insurance policy where you are investing your valuable money and time without getting the expected returns. Almost all life insurance policy comes with an exit route that can be exercised if the beneficiary wants to terminate the plan.
Now the next question that will hit your mind is how to get out of this complicated situation?
We are here to answer.
If you wish to terminate your life insurance policy for any reason, please read further.
Exiting the Policy in the Initial Phase
- Free Look Period: When one purchases a life insurance policy, he/she are benefited with 15 days period which is called a free look period. In this time, the buyer has the option to cancel the policy without any penalty. If the insurer cancels the policy for different reasons during this period, the insurance company refunds the amount invested by the buyer after deducting services charges, medical test charges and stamp duty.
- Lapse the Policy: The second step to make your way out of a life insurance policy after you missed the first one, i.e. free look period is to let the policy lapse. Yes, you read it right. It may not sound right as the idea of policy lapse comes with severe repercussions, but trust us there is no way around. What you all need to do is to stop paying the premium amount, and your policy will be considered lapsed. However, bear this in mind that insurance policy lapse means that your life insurance policy is not active thenceforth and does not provide any coverage.
Exiting the policy after three years
There are other options where a beneficiary gets to exit from life insurance plans before maturity. Following are a few of them provided by insurance companies
- Surrendering the Policy: It is an intentional step taken by the insurer to terminate the plan before the date of maturity. When you as a beneficiary quit the policy, a lump sum is paid back to you as cash value or surrender value.
The idea of surrendering the policy is only valid when the policyholder has continuously paid the premium for three years. Once you surrender the policy, you will be at the receiving end of getting accumulated premium.
Also, as per the terms, if the insurer surrenders the policy at the end of the 3rd year, he/she will receive a guaranteed 30 percent surrender value.
- Paid-Up Policy: As per the rules, if the beneficiary paid the premium for the first three years, not paying any further premium will convert the policy into a paid-up policy.
However, the policyholder has to wait for the policy to mature to get back the amount invested. The only benefit of converting the existing policy into paid-up policy is that the policyholder will continue to receive the bonuses attached with the policy. The sum assured will reduce and will now be called as paid-up sum assured.
Moreover, the life cover will not be any more equal to the original sum assured but paid up sum assured. The policy will further not be eligible for any bonuses. The policyholder or the nominee will receive the amount along with guaranteed bonus on maturity. In the event of the death of the policyholder before the policy matures, the legal heir or nominee will receive the higher of the paid-up sum assured or 105 percent of the premium.
It is advised to the person who is going to terminate his/her policy to first go through the repercussions of surrendering the policy as it comes with a cost. You will lose the life protection attached to the policy as they terminate the contract them and the company. Apart from this Tax benefits available under section 80C will also be reversed if you want to terminate the policy before time.
However, if you are unhappy with the policy you have bought as it is not providing you with the desired return, you can follow the above-mentioned rules. It is further advised to reach to your LIC agent for discussions as he/she can tell you things in detail and can help you get out of it.
(Views expressed in this article are a personal opinion of Naval Goel, CEO & Founder of PolicyX.com.)