January 30 , 2013
Mixing insurance with investments is one of the most common and often the most expensive financial mistake people make. Whether you can recover from them depends on factors like type of investment policy (ulip, traditional), how many years you've been paying premiums and remaining term.
To arrive at a confident action plan for your bad insurance policies you need three figures- 1. Surrender value, which is what your insurance-cum-investment policy would pay today if you terminate it, 2. Survival benefits anticipated at the end of term if you continue the policy, 3. Returns anticipated from alternate investment like mutual fund.
Surrender value accrues after 3 continuous years of premium payment. There can be a further lock-in period of 2 years before you can surrender. Not all policies have surrender value; those with investment component usually have some surrender value. Generally ULIPs and Endowment policies would have surrender value. You can find out if there is a surrender value from policy bond and call up at the service centre, providing your policy number to know surrender value of your policy as on date. Hopefully you will get most of your invested money back, or emerge with a minor loss.
So this is what you must do:
Keep paying regular premiums in the policy for the first three/five years
Once lock-in period is up, write to the insurance company for surrender
If you are in the early years of policy term and there are decades left you would definitely make more money by surrendering the policy for whatever value it fetches and investing in a good mutual fund instead. If that isn't the case stop further contributions to the policy and start investing in mutual funds or other products that suits your investment horizon and goal.
In the process don't lose your insurance cover. If you surrender ULIP or traditional policy get a term insurance cover. This is the only insurance worth buying. Even if you don't terminate the policy find out how much death benefit it has. Chances are you would be grossly underinsured. Get a term cover (from the same company or a different one) to make up for remaining insurance needed.