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While due diligence is important at the time of buying, if you realise that it isn’t meeting your requirements, surrender it or go for paid up option

Many policyholders simply let their life insurance policy lapse because they feel it is not suitable for them. But the question is: does it really make sense to lose the money that you have paid? The answer is no. The Sumit Bose Committee set up to recommend measures for curbing mis-selling says, "Distributors are likely to sell those products which pay most commissions as an upfront. There is little incentive to ensure the client continues in the product over the full tenure."

Often, customers are not informed of all the details about the policy they are sold such as premium paying period, sum assured on maturity, etc. This is why when customers realise the policy is not suitable for them or find that the premia are too high, they let the policy lapse. A traditional policy has two components - risk cover and investment component, which fetches the returns. If a policy lapses, the risk cover ceases to exist and the money paid towards risk cover is wasted. So are charges such as fund management charges, allocation charges, etc.

That is why before you decide to lapse a policy look at the surrender value. It is paid only if you pay premia for five years.“Since you have already borne the charges for some time, it is a loss to let a policy lapse. If you surrender the policy, you can invest the surrender value in a product that offers better returns and simultaneously buy a term life plan, since charges are low,” says Naval Goel, founder and CEO, PolicyX.com.

Mis-selling might be one reason for lapsing of policies, but from a customers’ point-of-view, there is no benefit in lapsing a policy. "When you buy an insurance policy you are buying an asset. You get a sum assured when you die or on maturity. Over and above that, you also get bonus. Lapsing the policy should be the last resort if you don’t have money to pay premium,” says a senior official from a private life insurance company.

Another option is to convert your policy into paid-up. If you have paid premia for a certain number of years but don’t wish to continue with the policy, you can convert it into paid-up. Here, you will get a lower sum assured, which will be a ratio of the premia paid until it becomes paid up. But the policy will continue till maturity or till the death of the policyholder. You will also get the bonus, if it has been paid till the policy becomes paid-up.

According to Yashish Dahiya, CEO of Policybazaar.com, a paid-up policy is better than surrendering the policy, because you still get some benefits.

If you want to revive your lapsed policy, most companies do not ask for documents if it is within six months. After six months, you might be asked for self declaration of your health status. In case you declare some ailment, the company might ask for a fresh medical examination and the premia might go up. These rules could vary from company to company.

According to Goel, offering simpler products will ensure customers know what they are buying. “Customers should be clearly told what the sum assured will be in case of death and at maturity. Currently, traditional products (endowment and money back plans) are very complex. They offer bonus at the end of third year, fifth year, etc. But this does not give a clear picture of how much money customers will get.’’

One of the most important things to do at the time of buying a policy is to ask for the internal rate of return, says Dahiya. “But customers don’t do this and that is why mis-selling happens. In case of unit-linked insurance plans (Ulip), returns are market-linked, which makes them even more uncertain. But often, customers are not informed of this at the time of sale.”