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5 Things You Probably Didn’t Know About Your Policy

Here are five simple facts which most Life Insurance buyers still do not often know about their policies

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Did you buy a Life Insurance plan at the penultimate moment in March to save taxes? If you did, you’re not alone – the industry’s aggressive sales tactics in the last quarter of the fiscal are legendary. However, the number of cases of “buyer’s regret” after paying a couple of premiums and discovering the actual benefits of the policy one has locked themselves into, are as high today as they were during the days that high cost ULIP’s burned holes in many a pocket! Here are five simple facts which most Life Insurance buyers still do not often know about their policies.

Sum Assured = Death Benefit = Maturity Value? Nope!

It’s a common mistake to equate the “Sum Assured” figure with the “Death Benefit” or the “Maturity Value” of a policy. However, this isn’t always true. In most traditional plans, both the Death Benefit and the Maturity Value are functions of the Sum Assured and would typically vary from 80% to 125% of the Sum Assured number as the policy years roll on. Make sure you trawl through the fine print on your policy document!

ULIP’s will cancel some units yearly

Wondering where a portion of your ULIP profits are disappearing each year? You’re not alone! Many ULIP buyers don’t quite understand the mechanics of ULIP plans very well. Basically, your ULIP has a “death benefit” incorporated into it. Intuitively, it follows that there will be a cost associated with providing you with this “death benefit”. This is known as mortality cost and is paid for by cancelling some of your investment units every year. Mystery solved!

Surrender values only accrue after 3 years

Traditional plans (such as the garden variety endowment plans offered by LIC) are usually very illiquid. In fact, they do not even acquire a surrender value before the payment of three full annual premiums! What this essentially means is that if you try to recoup your money after paying two premiums, you won’t be able to. Even after the third premium is paid, the surrender value is too extremely low (typically starting off at about 30% of the premiums paid). This keeps buyers locked into a vicious cycle of throwing good money after bad.

There’s a “discontinuation fund”

Should you choose to discontinued your ULIP after paying less than the mandated 5 annual premiums, you could do so. Once your policy lapses, it goes into a ‘discontinuation fund’ (post deduction of discontinuation charges) and there it lies until the mandated 5-year lock-in period is complete. Insurers are mandated to provide a not-so-great 4% return on the discontinuation fund value, minus a 0.5% fund management charge. After the 5th year, the money comes back to you. Bear in mind that the life cover (death benefit) associated with your ULIP ceases when your money moves into the discontinuation fund.

Life Insurance isn’t a great “investment” at all

Sorry to disappoint you, folks – but Life Insurance really isn’t an investment (except, perhaps, rather philosophically – an investment in your ‘peace of mind’!). ULIP’s, despite reforms, remain a poor second choice to a combination of top performing Mutual Funds plus a Term Plan. Endowment Plans continue to shroud their ‘returns’ in opaquely worded literature – but finally end up providing you with only 4-5 per cent returns in most cases. Life Insurance is to be correctly understood as a ‘risk transfer tool’ alone, and wise investors usually segregate them from their investment portfolios altogether.

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