IRDA Introduced Changes in Endowment Life Plan - IndianMoney.com

 

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 IRDA Introduced Changes in Endowment Life Plan

 

Reforms are a must in any sector. Life insurance is no exception. Reforms improve the quality of products and protect the interests of the investors.

Endowment life plans have very high charges during the initial years of the policy. These charges were deducted from the premiums you pay for the endowment life plan.

An increase in life insurance:

The reason you avail a life insurance policy is on your/policyholders death your family enjoys monetary benefits.
In an endowment life plan a very high percentage of the premiums you pay goes towards paying the commissions and fees of the life insurance agents.

So what is left for your life insurance?

As per new rules if you are less than 45 years of age you get a minimum death benefit of highest of the following:

• 10 times of annual premium

• Half of the annual premium you pay * term of the policy

• 105% of all the premiums you pay.

As per new rules if you are more than 45 years of age you get a minimum death benefit of highest of the following:

• 7  times of annual premium
• One fourth of the annual premium you pay * term of the policy
• 105% of all the premiums you pay.

If you are young in age, it is perceived that if you die early you would have lesser savings and leave less money for your family to survive. You would need a higher amount of life insurance.

A higher surrender value:

Before the reforms you had to pay at least 3 premiums for your endowment life policy before you could surrender the policy.

You would get 30% of the premiums you paid for the 2nd and the 3rd year on the endowment life insurance policy. You don’t get anything for the premium of the first year.

Post reforms if you surrender your endowment life plan:

If your endowment life plan has a premium paying period of more than 10 years then you can surrender it after paying premiums for 3 years.

On surrendering the policy you will get 30% of the premiums you have paid for the 1st year , 2nd year and the 3rd year of the policy.

If your endowment life plan has a premium paying period of less than 10 years then you can surrender it after paying premiums for 2 years.

On surrendering the policy you will get 30% of the premiums you have paid for the 1st year and 2nd year of the policy.

Commissions for the life insurance agents:

The commissions of the life insurance agents are linked to the premium paying period of the endowment life policy.

As per the new rules the commissions of the life insurance agents are higher in the initial years if the endowment life plan has a higher premium paying period.

If the endowment life plan has a lesser premium paying term the life insurance agents are paid a lesser commission in the initial years.

Commissions paid to the agents tend to be high in the first year of the endowment life plan and lessen gradually with the passage of time.

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What Happens When You Surrender Your Endowment Life Insurance Policy - IndianMoney.com

 

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IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice / education to ensure that you are not mis-guided while buying any kind of financial products

 

What happens when you surrender your endowment life insurance policy?

 

You purchased that endowment life insurance plan in a hurry to save tax. You find it a pain in the neck and want to get rid of it quickly as it does not match your needs and expectations.

This is when your insurance agent tells you to surrender your endowment life plan.

So what happens when you surrender your endowment life plan?

There are 2 types of values you get when you surrender your endowment life policy:

• Guaranteed surrender value.

• Special surrender value also called cash surrender value.

Guaranteed surrender value:

The surrender of your endowment life plan depends on the premium paying period of the plan. If your plan has a premium paying period of over 10 years you can surrender your endowment life plan after 3 years.

You get 30% of the premiums you have paid in the first year, second year and the third year.

If your endowment life plan has a premium paying period of less than 10 years you can surrender it after 2 years. You get back 30% of the premiums you have paid in the first year and the second year of the policy.

The endowment life plan is void after you opt for the guaranteed surrender value.

Special surrender value:

To know what is special surrender value you need to know what is paid up value of an endowment life plan.

You have stopped paying your premiums but want to enjoy the benefits of your endowment life plan. You can convert it to a paid up policy.

You can convert your endowment life plan to a paid up policy after holding it for 3 years.

The endowment life plan continues to be in force, but with a lower sum assured. You don’t get any bonuses after you stop paying the premium.

So how to calculate the paid up value of your endowment life plan?

Paid up value =(No of premiums you have paid/ No of premium payable)*    

                          Sum assured

                           

You have availed an endowment life policy with an annual premium of INR 30000.The sum assured is INR 4 Lakhs after 10 years (term of the policy).There is a bonus paid of INR 50,000 after 4 years of holding the policy. If you stop paying your premiums after 4 years the paid up value of your policy is:                  

Paid up value =   (4 /10)  * INR 4,00,000  =   INR 1,60,000.

                                 

You will get INR 1,60,000 at maturity (after 10 years) or your nominee gets this money after you die.

So what is the special surrender value of your endowment life plan?

The endowment life plan pays you a bonus. You have the guaranteed bonus, revisionary bonus and the maturity bonus.

Your total paid up value = Paid up value + bonus.

Special surrender value = Total paid up value * surrender value factor.

Surrender value factor varies from insurer to insurer and is generally 0 for the first 3 years of your endowment life plan. It could be 0.3 after 4 years of the policy.

You can calculate special surrender value as:

Special surrender value = Total paid up value * surrender value factor.

Total paid up value = paid up value + bonus

Total paid up value = INR 1,60,000 + INR 50,000 = INR 2,10,000.

Special surrender value = INR 2,10,000 * 0.3 = INR 63000.

If you know how to calculate the surrender value of your endowment life plan you can easily get the best out of it.

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About Endowment Policy - IndianMoney

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IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice / education to ensure that you are not mis-guided while buying any kind of financial products.

Endowment Policy

An Endowment Policy is a contract that is aimed at paying a lump sum after a specific term (Maturity) or on the death of the policy holder, whichever comes first.  Endowment policies can also be cashed in early (Surrendered) and the policy holder gets the surrender value which is calculated by the Insurance company. The surrender value is arrived at by taking into the account the duration that has lapsed since the policy started and how much was paid into it.

 

Therefore an Endowment Policy is a risk cover with potential for financial savings. If the policy holder survives the policy term, the sum assured has to be paid at the time of maturity. The alternative scenario is if the policy holder dies, and the sum assured has to be paid out.

 

Types of Endowment Policies

 

With Profit Endowment Policy

Under this type of Endowment Policy there is an amount guaranteed to be paid out, namely the sum assured. The premium amounts are invested in financial instruments like shares, debentures and fixed deposit schemes to name a few. If the investment give good returns, based on market performance, the final payout can be more than the sum assured of the Endowment Policy.
 

Unit Linked Endowment Policy

Under this form of Endowment Policy the premiums are invested in units of a unitised insurance plan. Policy holders can often choose which funds their premiums are invested in and in what proportion.

Surrendering an Endowment Policy

All Endowment Policies have a free look in period; this is usually a period of 15 days. If the policyholder has made any premium payments, this will be paid back minus any service charges.
If one is surrendering an Endowment Policy before the completion of 5 years it will have to be converted into a paid up policy, otherwise all tax benefits availed until then will be reversed.
If one is surrendering the Endowment Policy after 6 years, the policyholders have to consider a special surrender value. The surrender value depends on the premiums paid, performance of the funds as well the years left for maturity.

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