Have old policies? We’ll tell you what to do with them

Raju: Mohan, I am so tired sorting out these financial papers. It is not easy to keep them in physical form anymore.

Mohan: Raju, what financial papers are you talking about?

Raju:  II do not even remember which documents are lying here.

Mohan: Why don’t you use start e-filing your documents? It is somuch more convenient and easy.

Raju: I already do Mohan. But these documents are very old. These policies were purchased long ago by my father.

Mohan: Oh, so you are facing the same problem too.

Raju: No no. I am sure they will reap me good returns .That is why I have saved them and am sorting them out.

Mohan: Sorry to dishearten you, but these policies are not good enough to beat inflation.They are as good as junk now.

Raju: What are you talking about? What do you mean by junk? And even if they are indeed junk what should I do with them?

Can you identify with the above? Well, many of us have several money back plans or endowment policies which are just lying around in some recess of our drawers. The question is, what should we do with them? If you are in a similar situation, read on further about junk insurance policies.

 When we plan for an investment or savings, it is not always that the investment turns out to be beneficial. Some, although they are good, are not able to fight the increasing inflation rate and hence would turn out to be as good as junk policies. There are several money back plans and endowment plans which were purchased for you by your parents some years ago hoping that it will serve as a security for the future. Unfortunately, that is not what happened.  Most of us just hold them till their maturity without estimating their net worth. These policies, due to rising inflation, cannot provide sufficient returns to fulfill dreams and aspirations.

Top Reasons why you hold some Endowment Policies 

Many of us get misled by agents who promise huge returns

Many of us take hasty decisions and end up buying a wrong policy

Another reason for getting involved in a undesirable policy is that at the time of making the investment you may not have seen too many options but had to buy a policy to save tax.

It was presented to you as a gift from a close relative or a friend

Due to peer pressure or herd mentality you follow others holding the policy thinking that there may be something good that comes out of it since others are opting for it too.

What is meant by making a policy Paid up?

If you reckon that it is time to step out of the policy, then you can exit the policy. This means that you can stop paying premium for the policy. In such a case, you will still get the benefit but only to that level to which you have paid the premium while your insurance cover will fall short by that particular ratio.

Let us take an example

You have a policy which has tenure of 20 years and it was to provide you a cover of Rs 10 lakh. You realise that you do not want to continue with the policy and want to pay it up after four years. In such a case, the cover, which was Rs 10 lakh, will come down to Rs 2 lakh since you have only paid 20% of the entire tenure.

What is Surrender value?

Another option is that of a surrender value. Surrender value is you will receive if you decide to exit your policy before its maturity. Most of the endowment plans do not have a surrender value and those which do, have a low one.  Generally, the surrender value is equal to the net present value of the total amount which was due at maturity.  Let us elaborate with the following scenarios:

1. Premium paid for less than three years

If you have paid premium for less than three years and you do not have an option other than the surrender value, it is wise to exit the policy and not repeat the mistake . This is because it is useless to continue paying the premium for a policy which would not reap enough returns till its maturity.

2. Premium paid for more than three years but Policy has more than half the tenure left.
In case you have paid the premium for over three years but more than half of the tenure remains, you have the option to either exit/surrender the policy or continue with it.

3. Premium is paid for over three years but and policy is close to maturity

If you have paid the premium for over three years and your policy is about to mature and you realise that it has not reaped enough returns, do not let go of those funds. Wait for the policy to mature and then if you wish to, reinvest the money.

Important Points 

1:  Paying 3rd Premium

If there is a policy which is about to mature and the tenure of the policy was three years of which you are left with only one premium to pay, it is advisable to pay the last premium and reap the benefits of its maturity value rather than to surrender or exit the policy. The surrender value would nearly be the same as the NAV, therefore, you would not stand togain much. Since you would have paid more than half of the premium, it is better to pay the remaining amount too.

2: Getting Stuck

Several holders who are risk averse feel that even if the policy  gives very little return, it is still beneficial as it is in safe hands and is not exposed to risk. If thought wisely, the money invested in a policy is regarded as blocked and reduces purchasing power. If you are ever in need of cash, you will not be able to make use of that money as it would be locked.  So, not only do you lose benefits from higher returns, but also lose liquidity and have reduced purchasing power.

3: Stay clear of “Friendly ” agents

It is best to seek advice from finance professionals and not every other person. Several endowment plans and insurance policies are introduced every year. You are not required to invest in all of them. Carry out a background check and assess which suit your needs and requirements. Not all policies lock in your money, many also prove to be beneficial by earning extra returns. Keep your eyes open for such policies which give you an assured minimum return and also have a feature of stepping out while giving you good return.

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