Published in Mint on, Jul 09 2013, Written by Kapil Mehta
I had a pension policy and an endowment plan for which I have not been paying premiums for the last three years. Is it better to keep the endowment policy as paid up till maturity (2023)? The vested bonus amount is Rs.1.94 lakh in the policy and I have paid Rs.1,65,240 as total premiums till date. The pension policy was purchased in 2003 and the last premium was paid in 2009, so the total premium paid is Rs.70,000. The total fund value is Rs.1,25,000. If I close the policies, then what will be my tax liability?
—Harvinder Bajaj
Your endowment plan has returned an average of 3.8% per year. If you adjust for inflation, this is a negative return. There are two reasons for the low return on your traditional endowment. First, the expense in these products is high and second, the premium is invested primarily in relatively low-yield (but secure) government bonds and other debt instruments. For a product with a 20-year horizon, the returns are likely to be better if invested in equity.
However, the issue with surrendering your endowment is that surrender charges are penal. Check the specific surrender value in your insurance but chances are that surrendering the policy will doom you to negligible returns even if you reinvest the proceeds into a better yielding instrument. So I would suggest that you retain the endowment until maturity.
Similarly, I suggest retaining your pension policy until maturity. This recommendation is strengthened by the fact that your pension policy returned a better 8% annually.
There is some ambiguity around the tax treatment of surrendered insurance policies. However, a quick survey that I did with CFOs of a few insurers suggests that if you surrender your endowment policy, the proceeds will be tax free. If you surrender your pension plan, two-thirds will be taxed as income.
Could you tell me the process of transferring my pension policy to another scheme without losing the fund value?
—Simon
If your pension policy is a unit-linked insurance plan (Ulip) then insurers will allow you to switch the funds for a certain number of times at no cost. The switching process is simple. Just write an email to the insurer and it will make the switch or let you know the documentation required. In Ulips, you also have the option of re-directing future premiums into a new fund and leaving the current investment untouched.
Changing the pension plan (and not just the investment fund) is not possible.
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