Personal Finance

Don’t lock into long-term products

Suresh Parthasarathy | Updated on February 26, 2011 Published on February 26, 2011

I have four money-back insurance policies and my annual premium outgo towards all these plans are Rs 9,236. I hold two Jeevan Surabhi policies and two are other endowment type policies. Since I am not comfortable with their returns so far, I would like to surrender all the traditional plans (total sum assured under all plans totals to Rs 3.5 lakh) and to take a term insurance policy instead. What would you advise?

- Hariprasad

You have not mentioned why you purchased these plans in the first place. Assuming you bought them purely as investments, without any specific financial goals, do check the surrender value before you exit them.

Under money back polices, if you have been offered one or more survival benefits (paid at the end of specified term), the guaranteed surrender value will only be 30 per cent of the premium paid on or after the due date of payment of the latest survival benefit.

Calculate your loss after factoring in the last survival benefit under the each plan and decide the future course of action.

In general premia under money-back plans are higher than on traditional endowment plans. Therefore, if you are not re-investing the survival benefits every five year meticulously, your return on investment will be very poor.Going by the fact that your current risk cover is quite small, you ought to definitely buy term insurance. Term insurance should be bought based on the liabilities you may have to service over your life time and your gross income.

If you don't have any liability, buy a term insurance sufficient to cover seven times your gross salary.

I am aged 41 years. I have two daughters aged 16 and 12. An agent asked me to buy HDFC Children Double benefit plan for both my daughters. Is it advisable to take the policy?

- S.Wilma

This is a “with profits plan” and at maturity a guaranteed lump sum is provided. In case of your unfortunate demise, a lump sum equal to the sum assured is paid and your family need not pay any further premium. At the time of maturity, your child will get sum assured plus bonuses declared by the plan.

If you are buying the plan as an investment and for its tax benefits, it may be prudent to wait until the new Direct Tax Code (DTC) comes into effect. If not, and if maturity proceeds are to be taxed, your return on investment may not matching the inflation.

I am 30 years old and work as a lecturer in an engineering college. My current insurance investments are LIC Jeevan Anand where the sum insured is Rs 1 lakh and the annual premium is Rs 5621. I also hold a LIC money back policy for a sum insured of Rs 1 lakh and pay annual premium of Rs 6450. All these policies were taken in December 2008. My friend has recently suggested that I stop paying premia in the first two policies and instead invest in an equity linked mutual fund to avail tax benefits. Is that the right option?

- Arun

It is not uncommon for individuals to mix investments with tax savings. When investments are made, it is better to evaluate the tax efficiency of such instruments and buy it. It is equally important that insurance being a long term product, investors think through their options before committing to such plans. Insurance plans especially traditional ones entail substantial costs if discontinued in between, therefore it is best to continue. Please refer the answer to the first question on surrender charges.

Investments in equity linked tax funds may not be eligible for tax relief under the new DTC. However, you can invest lumpsums in it this year, before the new DTC takes effect.

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