Why are Surrender Values for life Insurance So Low

Background: 

If you have ever surrendered a policy, you would have been shocked at the meager amount you received. It would have been much lesser than the amounts paid by you. Let us try and explain why this was so.  

Insurance is a long term contract. Your obligation is to pay the premium on a regular basis. The insurer is obliged to provide cover against the insured event. Contracts can be terminated by either party usually by paying a penalty. Insurers rarely terminate a contract unless the policyholder has committed a breach of his obligations. In rare cases if an insurer goes out of business or winds up his business he may opt to pre-maturely terminate the policy. On the other hand, if you voluntarily terminate the contract before you pay all the premiums, and intimate the company that you are not going to continue, and seek a refund of premium, you have indicated a desire to surrender the policy. The entire premium is almost never refunded. The difference is the penalty for early termination and is called the surrender charge. These charges can be quite steep and is the reason why surrender values are so low.  

Insurance contracts can range from a few days to many years. As a general rule: 

• The shorter the contract the lesser the chances of getting any refund via surrender. 
• Pure risk policies have no surrender values (i.e. entire premiums paid is confiscated). 
• Indemnity policies have little or no surrender value. 
• The longer the duration of the policy, the greater the surrender value the policyholder will get.  

In India long term contracts are usually life insurance contracts and surrender is a provision in most of these provided they are savings policies. Pure Term policies have no surrender value. 

So why is Surrender Value Low? 

Unlike other products and services insurance is bought in installments: however the insurer is fully liable from day 1. Further, insurers spend a lot of money in the initial years for acquiring the policy, pay large distribution expenses and keep aside reserves for claims. These amounts are recovered by them over a period of time from the subsequent premiums paid by the policyholder. Thus if a policyholder breaks the contract by surrendering, the insurer will remain out-of-pocket. These are the amounts recovered by the insurer as surrender charge. 

We are not debating if the charges are justified or can be reduced. The fact is that surrender charges will always exist. Our advice is that one should always aim to continue a contract till the stipulated date. A roundabout way of minimizing loss is by splitting the policy at purchase such that the entire policy need not be surrendered if there is an urgent need for money. Insurers try and restrict this by offering rebates if the premium is large enough. As always, you can count on us to help you solve any questions you have on this issue. 

We at www.policylitmus.com try to offer the best possible advice and options for customers of insurance. Visit our website to find out more. 

Insurance Application Forms: The Truth, the Whole Truth and Nothing but the Truth

I like to read what I sign. So, when my agent asked me to put my signature next to the “x” on a printed form while buying a life insurance policy, I balked. I wanted to fill it up myself, I said.

The first thing that struck me was that the form ran into 5 pages of really small font. After the usual stuff regarding my name and address and phone number, I entered tortuous territory. My height (umm…5 feet 11?), my weight (78 according to the weighing machine in my gym, 75 according to what I tell my friends, 80 is what it really is), my chest size in centimetres (no clue), waist size in centimetres (10 centimetres more than what I would like it to be) and so on.

Still more difficult questions were coming.

No one seems to have told the insurance company that I do not understand their language. They use words that have no meaning for me. For example, have I ever lapsed a policy? What on earth is a lapsed policy? I could not find an explanation, so I said “no”. Have I ever been declined insurance? Wait a minute: I am paying money to you, what is going on? They also wanted to know if I will bungee jump, join a circus as a trapeze artist, drive a race car in my spare time, or jump off a mountain without wings? Most assuredly not I said. Do I suffer from a 100 diseases that I had never heard of? I travel to work by the Mumbai local train and that qualifies me as fit for the Olympics. 

Even if I did I would not know it, and I calmly answered in the negative. Do I drink (alcohol) or smoke (cigarettes, beedis, cigars), or chew (tobacco, gutkha)? Do I drug myself senseless? Have I ever seen a doctor? (I wish I had never).Do I have all my teeth? The only thing they did not ask me was if I kicked the neighbour’s cat on a daily basis. The last page was 30 lines of fine print that assured me that if I ever mentioned anything that was untrue, the most horrible consequences would visit me.

Most of us do not go through this exercise. We just sign next to the “x” and our agent fills up the form. When we get the policy, we dutifully file it, again without reading any of it.

What is it with insurance application forms that make them complicated and unfillable? Well insurance contracts are unequal in nature with the company knowing far less about you than you know about the company. Hence the company needs to know as much detail as it can. A word of warning to the wise: it is in our interest to fill up the form as truthfully as possible. Claims are settled based on the answers filled out.

Fine print and jargon are second nature to an insurance company because they need to protect themselves against fraud. Maybe they need to remember that most customers are honest and processes must be designed to help the good guys.

But you can trust www.policylitmus.com to make things clear to the insurance buying public. No fine print, just crystal clear unbiased information. Compare over 1000 policies and 50 insurance companies, without having to reveal your contact details. 

Should you include your parents in your health Policy?

Often I am asked by young professionals if they can include their parents in their health policies. They often are specifically looking for Floater policies that allow parents to be included in the policy. My short answer to them is don’t do it. Let me explain why.

Your health needs are very different from your parents.

Parents who are approaching retirement age have a much higher propensity to need medical intervention compared to a thirty or forty year old. They are better off having a dedicated amount for their own treatment rather than share it with the rest of the family members. Conversely your other family members run the risk of not having enough money left for their treatment. The ideal policy for a family with the eldest member in the forties is a family floater while for people above the age of 50, the best option is an individual policy.

Not financially prudent

In floater policies, the premium depends upon the age of the oldest member. All members attract a rate that is based on the age of the oldest member. When a member is above fifty year of age then this inflates the premium of everyone in the policy.  You are also likely to need a much higher sum insured if you include your parents in your policy. The best option is to buy a separate individual policy for them. The amount of premium that you would pay by separating your needs into two policies would in most cases be less than one single policy.

In conclusion I would say that the most important thing is to ensure proper medical cover for your near and dear ones. A single policy may often not fit the needs of both. The best course of action is to look for a floater policy for you, your spouse and children. For your parents look for individual policy where each parent has their own sum insured.

This article is written by https://www.policylitmus.com. PolicyLitmus provides a comparison of over 1000 insurance plans from 51 insurers and helps you protect your life, health and property.

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