Surrender charges in whole-life insurance plans are high

Published in Mint on , Aug 14 2012, Written by Kapil Mehta

My company has a group term life insurance for all the employees. If I leave the company, can I pay my own premiums and continue enjoying the term insurance benefit?
—Azhar K.

You will lose the term insurance benefit when you shift companies as this benefit is not portable. Consider purchasing your own term insurance plan independent of the company.

I started a company this year and want to purchase a keyman insurance. How should I go about this?
—Sunil H.

You will find it difficult to buy keyman insurance because your company is new and, most likely, you are incurring losses. If your company has confirmed funding then some insurers may cover you to the extent of the funding received. You could consider purchasing an employer-employee insurance, where the company pays for your insurance but the death benefit is paid to your nominee and not the company. This is different from a keyman where the death benefit is paid to the company.

I bought a whole-life participating plan from a private insurer in 2003. I pay annual premium of Rs.13,468 for an insurance cover of Rs.7 lakh. I have opted for an annual bonus payout (about Rs.6,000) to buy additional paid-up cover, which now amounts to Rs.1.5 lakh. After eight years of paying premium, I am now contemplating on surrendering it (for Rs.64,000) and instead buy a term plan of Rs.1 crore. Is it a good decision? Kindly suggest.
—Subash Nadar

I think you should surrender the whole-life policy and purchase a term insurance plan. The issue with whole-life plan is that surrender charges are very high. After eight years, you will lose 40% of the principal paid. Don’t throw good money after bad. If I assume you are 35 years old, a term insurance worth Rs.1 crore will cost you less than Rs.25,000. If you want to restrict the term insurance premium to Rs.13,468, then reduce your sum assured proportionately.

I bought a life insurance policy a month ago and paid the premium by cheque. I have not yet received the policy document. If something were to happen to me, would the claim be paid?
—T. Muralidharan

It depends. If your policy has been issued in the insurer’s records then the claim will be paid. However, if an underwriting decision has not yet been taken, then the insurer could deny the claim. Some insurers will pay the claim even if the policy is not underwritten and all the documentation and medical tests are in order.
Nevertheless, do not take a chance, have your adviser follow-up or escalate the matter with the insurer immediately.

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