Extend your insurance cover on paid-up policies

In case you are unable to pay premiums any more in your traditional or unit-linked insurance plans (Ulips), you can use the paid-up option. Here, the policy continues to remain valid. However, its maturity amount is reduced and is also called a reduced paid-up policy.

One may feel the need to get the policy paid-up, if it has been mis-sold or one is unable to fulfil the long-term commitment of paying annual premiums. Under such instances, where the policyholder finds it difficult to pay any further premiums, he can get his policy paid-up.

This will not require him to pay any future premiums while keeping the policy still in force. Traditional policies usually have a premium paying term (PPT) of 10 to 15 years, which can be a long-term financial commitment.

In the new guidelines on traditional products, a policy can get paid-up after the person has stayed active with the policy for at least two years.

Financial planners opine if one doesn't want to pay premiums, it's good to get a traditional policy paid-up, whereas, it's better to surrender a Ulip.

Reason: If a Ulip gets paid-up, policy administration, mortality and fund management charges will continue to be applicable and will eat into your fund value. On the other hand, traditional policies have an opaque and high charge structure. Hence, it's easier to get traditional policies paid-up as you know the maturity amount you are entitled to after a particular period of time.

What happens when the policy is paid-up? For instance, you take a 10-year money-back policy with death benefit and maturity benefit of Rs 5 lakh each, with an annual premium of Rs 20,000. According to the plan, the insured will get the maturity benefit amount in the 20th year.

After the sixth policy year, you realise your unable to make any more payments. You get your policy paid-up thereafter. After this, the insured doesn't have to pay any premiums and will get a reduced paid-up after 14 years.

However, Max Life Insurance lets such policyholders buy life cover through the extended term insurance (ETI) option. So, those customers have an option of either taking the reduced paid-up or activating the ETI option.

In addition, Kotak Life Insurance gives an option of automatic cover maintenance, which continues to give the death and maturity benefits to the insured even if he has missed two continuous premium payments on his policy.

Rajeev Kumar, chief actuary of Bharti AXA Life insurance, says: "We are also thinking on these lines, and are planning to launch an ETI option, where we can extend the sum assured to people on their paid-up policies."

V Viswanand, director and head product management and persistency at Max Life Insurance, says this ETI option provides flexibility to the policyholder who buys long-term savings-based insurance products. "The ETI option gives flexibility while the person's policy is in a non-forfeiture mode," he adds.

Here, the person can choose between the reduced paid-up option or buy life cover with the ETI option. Say for example, the policyholder here doesn't pay premiums from the seventh year (i.e. stops paying premium after the sixth policy year) and takes the ETI option, then the ETI sum assured (life cover) and the term will be calculated as given below.

After his policy becomes paid-up, he wishes to buy life cover through ETI option, a part of his diminished maturity benefit (also called reduced paid-up) will be utilised to give him insurance cover for the remaining years.

For instance, he is 41 when his policy got paid-up. Now, the life insurer will have to give him an insurance cover for another 14 years (four years of PPT-years of unpaid premiums 10 years of maturity benefit). Which means the insurer will have to cover him till he attains the age of 55. However, the original sum assured of Rs 5 lakh remains the same. The insured doesn't have the option to increase or ask for a lower sum assured.

Now, the life insurer will factor in the person's age and risk to health and arrive at a premium payable for that sum assured (which is Rs 5 lakh). "Taking the same example into consideration, we would need roughly about Rs 28,000 to give him a cover of Rs 5 lakh. Here, the life insurer will take this money from his cash value accumulated (which is Rs 92,000) and refund the balance amount to him," adds Viswanand of Max Life.

Since the cash value of the policy is higher than the required premium for the ETI sum assured for a term of 14 years, an amount of Rs 64,000 (Rs 92,000 - Rs 28,000) will be paid back to the policyholder.

When a person opts for this ETI option to buy himself an extended sum assured/life cover, his policy is technically converted into a single premium policy. As mentioned above, the person will get a Rs 5 lakh cover for Rs 28,000 premium paid.

Hence, in case that person dies on or before he attains the age of 55 years, he will be paid a death benefit of Rs 5 lakh. Whereas, he gets nothing on survival after 55 years of age. On the other hand, had he taken the reduced paid-up option, he would have got a reduced maturity amount plus bonuses accumulated at that time.

If a person misses two annual premium payments on his traditional policy, the automatic cover maintenance kicks in at this time. This allows the person to either revive the plan or continue the policy as paid-up." Hence, the person gets two full years, to decide if he wants to make the policy paid-up or not. However, the flip side to the ETI option, as the whole idea of long-term savings is lost if the policy is exchanged for an extended sum assured.