Assigning life insurance policy to a friend is not advised

Published in Mint on, Feb 26 2013, Written by Kapil Mehta

A friend recently committed suicide and he is survived by his mother and sister. His policy is five years old. Are claims given in suicide cases?
—Raina

Your friend’s nominees will get the entire death benefit. Death benefit is not paid if the policyholder commits suicide within a year of buying the plan.

I have a slight problem walking due to polio, but this does not impair my mobility. I plan to buy a term plan. Does the premium depend on the severity of the disability, or is it at the discretion of the underwriter?
—SK

Most insurers will issue a term plan to you at standard rates. Underwriters do not expect mild polio to affect longevity.
Underwriting is a craft where the final decision is a combination of formulaic and discretionary factors. I have seen several situations where insurance for an individual has been initially declined. Subsequently, when the case was properly represented to the underwriter, the decision was reversed.
Insurers are particular about maintaining their underwriter’s independence. Be careful of advisors who tell you that they will exert influence to get a policy issued even if you are unhealthy or your documentation is incomplete.

I am 65 years old and have a 30-year life plan that has already completed 15 years. I need some money and a friend has offered to pay me more than the surrender value in return for assigning my policy to him. Please advise.
—Gian. M

I think you will lose a friend if you assign the policy. Consider the conflict of interest: your friend will have the maximum returns if you die early. Also, your policy was likely issued by the Life Insurance Corp. of India (LIC) in 1997. LIC generally discourages such assignment because there is no insurable interest in the transaction. The concept is called stranger owned life insurance and is illegal or discouraged in most parts of the world.
Instead consider taking a loan against your policy or simply surrendering it.

I purchased a pension plan in 2008. The fund value is now equal to the total premium paid. Should I continue the plan?
—Atulya

Pension plans have several issues that you need to be aware of. First, two thirds of the maturity value needs to be invested in an annuity or a pension product. Most insurers are conservative in setting annuity interest rates because the longevity and interest rate risks in India are not yet well quantified. The underlying interest rate in annuities tends to be 5-7%. Second, annuities are treated as income and taxed.
Third, most unit-linked plans sold in 2008 had very high charges. A further investment in these is expensive. Consider discontinuing the policy because it’s unlikely that there are surrender charges and since there are no fund gains, the tax impact will be minimal.

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