Life Insurance is not simple to understand.
It is probably the must-to-purchase product, but least understood. Due to lack of knowledge, we depend on our Agent or Bank or Teleservice executives who convince us to purchase policies which is most beneficial for them, not for us.
In this regard, we end up buying the wrong policies with a high premium load and cannot continue till full term to get the best out of a life insurance plan.
We endeavor to educate people regarding life insurance plans, enabling them to choose the best plan for themselves.
Let’s understand the system.
What is PAID UP?
Life Insurance is a contract between you and the life insurance company. When you purchase a Life Insurance Policy, all the benefits are calculated based on the continuation of the policy till the full term.
If you fail to continue the policy, you will get reduced benefit, provided you paid three years’ total premium.
The Paid-Up concept is relevant only for Traditional Plans, not for ULIP Plans.
Instead of technical description, let’s understand with an example:
X has purchased a life insurance policy as below:
• Premium Paying Term 10 years • Policy Term 15 years • Premium 1 lac • Death Benefit 12 lac • Maturity Value 15 lacs
Unfortunately, X paid three premiums and unable to continue further. What will happen to the policy benefits?
All the benefits mentioned above are based on:
X pays the premium for 10 years.
Maturity Value will be= Actual Maturity value* Years of premium paid.
Original Premium Paying Term = 15,00,000*3/10 = 4,50,000/-
If X does not continue the policy after paying 3 premiums after completion of the term (In this case, it is 15 years), he will get 4,50,000/-
Similarly, what will the nominee of X get if unfortunate death occurs in the 7th year?
Death Benefit will be= Actual Death Benefit* Years of premium paid.
Original Premium Paying Term = 12,00,000*3/10 = 3,60,000/-
If X dies in the 7th year, the nominee will get 3,60,000/- in the 7th year.
In both cases, X is entitled to reduced PAID UP BENEFITS.
To qualify for a Paid-up benefit, you have to pay a minimum of 3 years premium. In some short-term policies, paid-up is 2 years premium payment.
If you pay less than Paid-up eligibility, your premiums paid will be forfeited, and the policy goes into the lapse stage.
In a bonus plan bonus accrued till the time you pay the premium will also be considered.
Suggestion: To get the best benefit out of a Life insurance policy, continue till full term.
What is Surrender:
Suppose X wants to terminate the policy before its maturity and decides on a mid-term withdrawal. That is called Surrender.
What will be the Surrender Value? You end up losing a considerable percentage of premature Surrender is done. Below is a standard format of Guaranteed Surrendered Value:
Surrendered after 3 years (Some policies 2 Years), you will get 30% of premiums paid.
Surrendered after between 4-7 years, you will get 50% of premiums paid.
Surrendered after in the last two policy years, you will get 90% of premiums paid.
For each policyholder specific Guaranteed & Special (Including eligible bonus) surrender value, years wise is mentioned in Benefit Illustration in the policy bond.
Advice: More you understand your purchased policy better, you will minimize chances of Paid-Up & Surrender.
Purchase Policy of your choice, asses premium paying capacity, assess risk, and then go for purchase.
