Options for Your Unwanted Life Insurance Policy
Monday, September 16, 2019, 6:00 PM | Leave Comment
A life insurance policy is generally bought to secure the financial needs of the family after the death of the insured.
It provides security to the family of the insured and enables them to maintain the same standard of living.
A life insurance policy is also a vital component of financial planning for an individual.
Along with planning for the future tax planning is also an important task. Individuals invest in a multitude of schemes to avail tax benefits.
Buying a life insurance policy is one such avenue where people can save tax on the premiums paid on the policy every year. This is one of the reasons why some individuals purchase life insurance policies which they do not need and which do not meet the individual’s requirements.
Sometimes insurance agents sell wrong insurance policies to people just to meet their sales targets. These agents make individuals think that the plan is suited to their needs and most of the people fall into these traps.
The mental barrier that most people have regarding losing the money invested, stops them from selling and exiting from these unwanted policies.
It is important to exit and sell these policies rather than compounding the blunder.
It is better to invest in other financial products which suit the need of the individual and help him or her to achieve their financial objectives.
The following factors should be examined to know if the individual has an unwanted life insurance policy:
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Low Coverage
In case the total coverage offered by the policy is not a substantial amount of the premium paid on the policy, the policy is not a good investment as such. This implies that the individual is paying in excess of what the policy is offering in return.
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Amount of Premium
According to a well-established thumb rule, the premium that an individual pays for a life insurance cover should not amount to more than 5% to 8% of the individual’s annual income. People should not be paying very high percentages of their annual incomes as premiums.
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Tenure
In case the life insurance policy purchased by the individual is maturing before his/her retirement, it is of not much importance, as the maturity amount is most needed after retirement.
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Returns
Money back policies and endowment policies generally offer returns of around 6%. If the individual is not satisfied with these returns, these policies can be sold as they are not meeting the expectations and requirements of the policy owner.
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Time Value of Money
While examining the attractiveness of the maturity amount, inflation should always be considered. The maturity amount might look attractive in the present but its value might not be that attractive once inflation is factored in.
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Alignment with financial plan
The life insurance policy bought by the individual should be fitting in with the financial plans set by the individual. In case the policy subscribed for is not helping the individual meet his/her financial objectives, it is better to get rid of the policy.
There are certain ways in case an individual can get rid of an unwanted life insurance policy.
The options available are letting the policy lapse, surrendering the policy, converting the policy into a paid-up plan and selling the policy to other investors.
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Selling the policy
The policyholder can sell the policy to investors for cash. The investors in turn would receive the benefits from the policy when the policyholder dies. It makes sense to sell the policy in case the policyholder cannot afford the premium payments or has no insurable need. Selling the policy makes more sense than letting the policy lapse or to receive the surrender value which is often quite less. A life insurance policy is like any other asset, which can be sold to investors in case the policy is not performing how the policyholder expected it to perform. Many investors or companies buy such policies to use as collateral, in case the need arises.
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Life Settlements
A life settlement company helps the policyholder to get rid of an unwanted life insurance policy. The life settlement company buys the life insurance policy from the individual and pays cash to the policyholder in return for the policy. The policyholder is not liable to make premium payments anymore and is not entitled to any future benefits arising from the life insurance policy. The death benefit passes to the investor who has purchased the policy. Generally, if the individual is aged and the policy has a substantial death benefit, the policy might be of value to investors.
In case the policyholder is worried that the life settlement company would resort to means to realise the death benefit quickly, the person has nothing to worry about. When the life insurance policy is sold, it becomes a part of a pool of policies which is managed by a financial institution other than the one which has purchased the policies.
The policy is generally sold again as a component of a bigger sale including many other similar life insurance policies. There is a high level of privacy in the transaction and the procedure. Whole life policies which comprise of a built up cash value and term life plans that can be converted into permanent insurance hold value for the investors.
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What to expect
The policyholder should not expect to receive the face value of the policy. The amount received is usually between the cash value and the value of the death benefit. Other factors like loans against the policy, premium amounts and the cash value also determine the offer amount. This offer also depends on the life expectancy of the individual. In case the policyholder has a shorter life expectancy, a larger settlement is made.
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Make proper comparison
Compare the amount offered by different life settlement companies before settling for one company. It is important to compare choices to realize the highest value for the life insurance policy. It is vital to obtain quotes from all interested purchasers before making the final decision. It is also possible to sell the policy partially and retain some portion of the death benefit.
Selling a life insurance policy involves considerable time and efforts. It is important to buy a life insurance policy that meets the requirements of the individual. The customer should make proper research and buy a proper life insurance cover instead of buying the wrong policy which might be unwanted in the future. The policyholder should also note that selling is only one of the options to get rid of an unwanted life insurance policy. The individual can also opt for the surrender value or the paid-up plan options of the life insurance policy.
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