Many a times customers being misguided or under an obligation of being to known person, falls prey to insurance agent in buying an insurance policy. Though IRDA has made strict rules to tackle the malpractice but still agents lures customers by stating guaranteed double digit return and high bonus rates. Fortunately there are few corrective measures which you can consider for the Unwanted and Mis-sold Insurance policy.
Before moving onto the corrective measures lets us first see know the basic types of insurance policies in existence:
- Endowment Plans.
- Money Back or Cash Back Plans.
- Retirement / Annuity products.
- Unit Linked Insurance plans.
How to know whether the insurance policy is mis-sold to you?
- Objective of the policy is not as per your desire.
- Returns do not match as stated by agent or stipulated in the policy document.
- The maturity benefits do not fulfil your requirements.
If you found any of the above conditions applicable to you than you must understand the best way to limit your losses and to utilize the mis-sold insurance policy.
What are the Corrective Measures for mis-sold insurance policies?
- Cancel the Policy in Free-Look Period.
- Let the policy lapse.
- Surrender the policy.
- Make it a paid up policy.
- Availing loan against policy.
Let us examine each of the above measures in detail.
Cancel Insurance policy in Free-Look Period
Free-Look Period is a 15 days period given to the policy holder to read policy document carefully and if found not suitable or do not meet the requirements, policy holder can cancel it within that period. The Free-look Period is applicable for each and every policy and the benefit is available only up to the 15 days from the date of issuance of policy. If the policy is cancelled in the free-look period, all the money paid would be refunded after deducting the charges such as administrative costs etc. However, once the free-look period gets over, policy holder needs to seek other alternatives.
Insurance Policy Lapse
Insurance Policy gets lapsed when premium is not paid up to the three initial years or the period specified for this purpose in the policy. Usually, every traditional policy except ULIPs has the criteria of 3 years while ULIP Policy has the criteria of 5 years. Once the policy is lapsed the risk cover comes to an end and no maturity benefit is payable to the policy holder.
In case policy holders forget to pay the premium within the due date or even in the grace periods of 30 days after the due date, the only remedy for revival of policy is reinstatement. Reinstatement can be done by paying the due premiums along with the interest and penalties, if any.
Surrendering Insurance Policy
Surrendering the insurance policy means stop paying the premiums for the policy and cancelling it before the stipulated time period. A policy can be surrendered after paying the full premiums for initial 3 years except in ULIPs which is 5 years. The amount receives on surrendering the policy is called the Cash Value. This cash value is calculated as follows:
Cash Value = 30% of (Total Premiums Paid – First Year Premium) + Any Bonus
For Example: I have taken a Jeevan Anand Policy for sum assured of Rs.6 lakhs. The premium is Rs.23,153 per annum. So if I surrender policy after paying premium for 5 years, the cash value assuming no bonus accrued would be
Cash Value = 30% * (23153 * 5 – 23153) + 0
For Unit Linked Insurance Policies, surrender is possible only after 5 years at 100% fund value. That is full fund value without deducting anything would be paid to the policy holder. In case the policy holder goes for surrender before 5 years, IRDA has instructed Insurer to create a reserve for ULIP policies and put a certain percentage of premium collected every year in order to provide higher surrender value in case of pre-mature surrender before 5 years.
Read: LIC Bonus Rates 2015-16
Paid-Up Value Policy
To make a policy paid-up, policy holder is required to pay premium for minimum stipulated period (usually 3 years for traditional policies). The insurance policy would continue but with a reduced sum assured. This reduced sum assured is termed as a paid-up value of policy.
The paid-up value would be calculated as follows
Paid-Up Value = Sum Assured * (Total Premiums Paid / Total Premiums for full tenure)
For Example: If against the full tenure of 25 years I stop paying premium after 5 years and also do not surrender my Jeevan Anand Policy. The policy would become paid-up policy with reduced sum assured of
At the time of maturity, I will get the reduced sum assured along with the maturity benefit on maturity of the policy.
This situation normally happens when large sum assured policies are bought and the burden for premiums becomes burden or the policy holder realizes the returns would not be up to the mark.
Availing Loan against Policy
The last resort to unwanted or mis-sold insurance policy is to avail loan against the cash value of policy and pay the future premiums with it. This way you can avoid the losses of surrendering the policy or reduced sum assured. The only thing to consider while availing loan is that the interest cost should be lower than the yield of the policy because the return of the policy would compensate the interest and you would get full risk coverage throughout the policy tenure.
This option is feasible only if you have paid around half of your premiums because the rate of interest of bank loan is almost one and a half times of what you yield from traditional plans. Also the bank gives only 60% to 70% of cash value as loan.