Life insurance is essential for everyone, especially those who have dependants. There is no other way to provide financial security for the dependants, in case of an individual’s death. All other monetary instruments only give their accumulated value to the nominee, against the death claim. In life insurance, the nominee can receive the sum assured and accrued bonuses, irrespective of the policy’s accumulated cash value. This is the main attraction of life insurance. If the policyholder survives the policy term, they can enjoy the maturity benefits, which include the sum assured and any accrued bonuses. Life insurance policies serve as a crucial financial safeguard for individuals and their dependents. However, certain circumstances may reduce or impact your payouts from your life insurance policy, ultimately leading to potential financial losses.
Situations in which you may suffer losses in life insurance.
1. Surrender of your life insurance policy.
The term surrender in life insurance means quitting from the contract of insurance. Insurance is a contractual agreement between the policyholder and the insurance company. Under this agreement, the insurer is responsible for providing benefits in a predetermined and agreed-upon manner. To receive these benefits, the policyholder should pay premiums for a designated timeframe. Surrendering your policy means you’re voluntarily ending the contract, a decision that’s made solely by you. As a result, you will be responsible for any losses or forfeited benefits that have accrued. Quitting a life insurance policy prematurely can lead to considerable financial consequences and potential losses.
2. Lapse of your life insurance policy.
If you don’t pay your premiums, your life insurance policy may lapse, causing you to lose your benefits and coverage. In such case, your nominee will not receive the full benefits in the event of your passing. Additionally, your policy will become a reduced paid-up state. In such cases:
- You will no longer be eligible to participate in the insurance company’s profits for the basic sum assured.
- However, you will still be eligible to receive bonuses on the reduced paid-up sum assured at the time of policy maturity.
- In the early years of your life insurance policy, high charges often apply, leading to a relatively low cash value.
3. Loan against your life insurance policy.
Availing of a loan against your life insurance policy can be a convenient way to access funds for urgent needs. Once your policy has acquired a surrender value, typically after a specified period, you can borrow against it. The loan amount you can avail of depends on the paid-up value of the policy. However, failing to repay the loan on time can result in significant losses.
Beware of these factors while availing of a loan against life insurance.
- If you fail to repay the loan, the outstanding loan amount and accrued interest will be deducted from the policy’s maturity value.
- If you stop premium payments after taking a policy loan, your policy will be forfeited if the total loan balance (including interest) exceeds the cash value.
- If the policyholder died after availing of a loan, the nominee is entitled to receive a death claim amount after deducting the outstanding loan amount and interest.
4. Expectable losses in ULIPs
Unit Linked Insurance Plans (ULIPs) are attractive, as these plans provide insurance coverage and capital growth. The sum assured in ULIPs is the amount of insurance coverage. ULIPs are not eligible to participate in the insurance company’s profits. Besides, the value of ULIPs may grow or shrink according to market conditions. If you decide to surrender your ULIPs during declined market conditions, it may result in a potential loss.
