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Rajesh Mehta (name changed), was mis-sold a policy by an agent who assured him unrealistic returns and said he wouldn't have to pay any more premiums. But it didn't end there. Rajesh also realised that he had to pay a premium for the next 15 years (policy tenure), as he was sold a regular premium policy. Rajesh later decided on an alternative measure to protect himself from paying further premiums - convert the policy into a fully paid-up one.
Rajesh had to pay annual premium for three years. But that meant he wouldn't be required to pay any future premiums and he would get the maturity amount, though with a diminished value.
Using the 'paid-up' option helps people keep their policy in force with reduced benefits and thus not lose much. Suresh Sadagopan of Ladder7 Financial Advisories says this option is useful when you are stuck with a wrong product, either because of mis-selling or due to the choice of a wrong policy. "Many make the Ulips paid-up, if they are underperforming or if the premiums are too high in traditional policies," he says.
One can activate this option by paying three annual premiums. In the new guidelines on traditional products, one can do this over a period of two years.
GN Agarwal, chief executive officer of Future Generali Life Insurance, says on an average five to 10 per cent of policyholders make their policies 'paid-up'. "This option is widely used in traditional policies. After the policy tenure is over, the insured gets a diminished maturity amount plus bonus (for the number of years premiums were paid) and loyalty additions (if any)."
The sum assured in a paid-up policy is reduced to a proportion of premiums paid till date by the policyholder and number of times premiums have been paid.
Anuj Bhagia, chief marketing officer at Policybazaar.com, explains that paid-up value is usually calculated as the (number of paid premium X sum assured) / total number of premiums. "If a policy with sum assured of Rs 40 lakh and policy term of 25 years had to be made paid-up after five years, then the sum assured would automatically be reduced to Rs 8 lakh," he adds.
While the sum assured shrinks considerably, Gaurav Mushruwalla says it may benefit people at higher ages and those for whom getting a policy may be difficult, because they can continue to be insured under the same product for the same premium till the policy matures. In a paid-up policy, a diminished sum assured is paid on death or on maturity.
For traditional policy holders, it's better to use the paid-up option as it helps reduce your premium outflow and keeps your policy alive as against completely surrendering it.
However, experts say, it's good to surrender a Ulip. Reason? If you make the Ulip paid-up, policy administration, mortality and fund management charges will continue to be applicable, which will eat into your fund value. Traditional policies have an opaque charge structure. But the maturity benefits are known and hence you can calculate whether it's still attractive to continue with the policy.
By contrast, surrender value of traditional policy is 30 per cent in the second and third years, and 70 per cent in the fourth year, excluding the first year premium. In addition, if a policy is surrendered one doesn't continue to get life cover unlike if the policy is paid-up. So, before you decide to surrender your policy, try out a 'paid-up' option first if you want to keep it active.
