Existing insurance policies doesn't suit now? Here's help

The key objective of any life insurance is to protect future income of the family, in case of untimely death of the bread winner. People tend to buy life insurance policies for varied reason. Some buy it for high returns, others as tax saving instruments and sometimes they are purchased just because their agent has persuaded them to buy the policy.

Pankaj Mathpal, Optima Money Managers suggests what to do with existing insurance policies if any individual already owns that are probably not suitable for them.

Below is the edited script of his interview with CNBC-TV18's Latha Ventakesh and Reema Tendulkar

Q: Very often, people may buy insurance policies that are probably not just suitable for them. What should they do with those existing policies?

A: The key objective of life insurance is to protect future income of family in case of untimely death of the bread winner of the family. Many times these insurance policies are bought expecting high returns from them or just for tax saving. Sometimes these policies are even bought because your agent or your relationship manager (RM) in bank has persuaded you to buy these policies, without explaining the features and benefits and also without sufficient insurance cover.

Now, as per Insurance Regulatory and Development Authority (IRDA) regulations you get 15 days free look period after receipt of policy to understand the policy's terms and condition. In case you are not satisfied you can return it back to the insurance company. Later, if you realise that policy is not suitable, then in such a case you have to see what the benefits are and how many premiums have been paid. Also what sort of policy you have bought.

In case it is an endowment policy and you are in the initial years of your policy and only limited number of premiums has been paid then in that case, it will be advisable to surrender the policy. You may lose a large amount of a premium that you have already paid but if you invest that surrendered proceeds, along with future premiums in a high yield investment scheme then you will not only recover the losses but also get better returns.

If you realise that you have bought a wrong policy in middle of term, when sufficient number of premiums have been paid then in that case, it is better that you convert your policy in a fully paid up policy. This fully paid up policy will stop participating in the future profit of the company but at the time of maturity, you will get your premiums along with accrued benefits. In case you are near to the maturity of policy then it is better that you pay the future premiums remain invested and enjoy all the benefits of policy because if you surrender the policy at this stage, you may not be able to recover the losses.

In a Unit Linked Insurance Plans (ULIP) there are several charges applicable, which are transparent. So in case you have ULIP then look at the surrender charges that are applicable after the lock-in period. If the surrender charges are limited and you feel that you can save the future charges, it is better that you surrender your policy anytime after that lock-in period.

Q: Can various insurance policies be clubbed together?

A: It is not possible to club all polices, every policy is individual. You will have to analyse these polices; their benefits and feature. First, you should check whether you have bought a term insurance policy because a term insurance is the most suitable policy, which serves the purpose of insurance.

If your family members are financially dependent on you, then my first advice is that you should buy a term insurance policy before you think of surrendering any of your policies. Secondly, you see look at the surrender value of your existing policy and the benefits, and accordingly you can take decision.

It is imperative that you first understand your policy, read all the features. Get the reports from the insurance company about their surrender value, unit value, etc and accordingly you take a decision.