What is a paid-up policy?

Sahil – Hey Ravi, what are you thinking?
Ravi – Oh, I just received a premium due intimation for my life insurance policy. It is a traditional plan which my father’s friend who is an advisor had sold me some years back. At that time, I did not know much about the various investment options and just proceeded basis what uncle recommended. This policy has very low insurance coverage, very basic returns on maturity but the premium is quite high. I have realized that this plan is not suitable for me. I am not sure whether to continue or surrender the policy as I don’t want to pay any more premiums in this policy.
Sahil – I too was in a similar situation like you but fortunately I made my policy paid-up and am investing the premium amount in other avenues which can give me better returns and for my insurance needs I bought a term plan. Why don’t you also make your policy paid-up?
Ravi – Paid Up? What’s that?
Sahil – Oh, Ok. Let me explain. When you make your policy paid up, you are no longer obliged to pay premiums. The life insurance coverage reduces in proportion to the premiums paid. For eg: In your case the policy and premium payment term is 20 years and Sum Assured is Rs 10 lacs. As you have paid 5 full premiums, your paid-up Sum Assured will be 5/20 of 10 lakhs i.e. Rs 2.5 lacs. This reduced sum assured is payable as death or maturity benefits.
Ravi – When can I make my policy paid up?
Sahil –  It depends on the premium payment term. If the premium payment term is less than 10 years, then policy can be made paid up after paying 2 full premiums. If the premium payment term is more than 10 years, then 3 full premiums should have been paid for this facility. Since you fulfill the latter criteria, you can opt for paid-up facility.
Ravi – My policy also has a bonus feature. What happens to the bonus accrued till now if I make my policy paid-up?
Sahil – You are eligible to receive the proportionate bonus. This will be added to your reduced sum assured and paid along with death or maturity benefit. However, whether you are eligible for future bonuses and guaranteed additions will be mentioned in your policy contract or you can check with your insurance company.
Ravi – What if I wish to surrender my policy after I make it paid-up?
Sahil – Yes, you can surrender the policy. The surrender value calculation would be mentioned in your policy contract or you can check with your insurance company.
Ravi – What about policy loan in a paid-up policy?
Sahil - Some insurance companies do offer policy loan. Whether your policy is eligible for a policy loan will be mentioned in your policy contract or you can check with your insurance company. Also note that, if the policy loan amount is not paid back within the stipulated timeframe, then the paid-up policy can be surrendered by your insurance company to recover the loan amount.
Ravi – I think I will make my policy paid-up and invest the premium amount elsewhere in avenues which can meet my savings goal. As for insurance, I will buy a term plan. Thanks a lot for guiding me.

Sahil – You’re most welcome! 

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