Is your investment plan still relevant?

There's nothing called bad investment product as all of them are designed after a substantial thought and to address a particular need(s). So, it could be best described as suitable or unsuitable investment avenue than judging it as good or bad. Also, the very good or suited product that one has opted at some point in life could turn out to be stare as a bad option or unsuitable. This is because of the changed circumstances and priorities of that individual. Hence, it's important to identify goal to each of the investments and see if that is still relevant to hold under the latest circumstances.

This query creeps up with insurance products on a regular basis for many investors. Of course, there're many types of insurance products like term to endowment to annuities, etc. Each of them serves a different purpose and even then, we cast a doubt on what they achieve or are they still pertinent in the overall scheme of things currently unfolding. That's why a periodic review on insurance should be done every three to five years. This exercise helps us to assess what's the current insurance requirements are and how one is placed at.

A comprehensive financial planning review encompasses this also but in case, one has skipped or not considered, it's ideal to review the insurance portfolio periodically. First, as they assess the various liabilities like outstanding loans, future commitments, etc. it would give a ballpark figure of what should be the ideal risk cover one needs to have. One could then check for their existing insurance cover and see how to bridge the gap. The best way is to do with a term plan, it's the most economical way to get desired cover.

If there were other insurance plans which one has opted a few years back and if the goal has changed or the purpose isn't being served, then one could close such plans. One must check for the terms and conditions in that case as many of these plans when closed prior to maturity could attract hefty penalties. For a market linked plan, the benefits might seize immediately if still is during the premium paying term.

The closure could be achieved by surrendering the plan, however, should be the last resort. Surrendering an insurance plan would most times have adverse impact on the policyholder as the clauses are skewed against their favor. Moreover, the surrendered proceeds might not reach the individual immediately if the policy is less than 5 years of vintage. In the market linked or unit linked insurance plans (ULIP), the fund value is visible but in a traditional plan, the bonus information and the accrued value isn't known easily.

In such plans, investors should first find out various information regarding bonus etc. and could instead opt for paid-up of the policy. Paid-up wouldn't provide any surrender benefit i.e., no pay out is given as this allows the policyholder to reduce the benefits to the extent of the already paid premiums. In a paid-up, the sum assured and the other benefits are reduced to the extent of the premium paid though a calculation involving what was paid and what to be paid is considered before arriving at a precise percentage.

The benefits of opting for paid-up is that the policy remains in-force, albeit reduced coverage along with the accrued benefits like bonus. In some plans, the bonus is not added further during the paid-up so one should be aware of the conditions specific to their plan. Maturity benefit is available which is accordingly reduced. This option helps those investors who find their plan mayn't be optimal for their future while reducing or eliminating future obligations (premiums) continue to enjoy the cover (reduced) and other benefits.

Surrender could be availed in case of urgency in need of money, but it comes with heavy penalties of surrender charges. Especially these charges are higher during the initial periods of the plan, decreasing as the plan reaches towards maturity. One should understand that there's no one-size-fits-all approach and each must maneuver according to their needs.

(The author is a co-founder of Wealocty, a wealth management firm and could be reached at [email protected])