Try to avoid loan against your insurance policy.

Many people for various reason do not want to continue paying their insurance premiums and think of discontinuing their insurance policies.

While for some, the reason for discontinuing their policy would be a scramble for cash, for many others, it would be a sudden realisation that their policy is offering very low returns. 

However, many do not know that if you have not paid your insurance premium for three continuous policy years, you do not get anything back from your life insurer.

So, before buying a policy, you should assess your financial ability to pay your future premiums. You should separate your investment and insurance needs. 

Insurance is not an investment avenue and should not be bought for high returns.

Why is it so?

When a life insurance policy is in force for a minimum of three years, it would acquire a cash value.

The cash value is the savings portion of a life insurance policy. It is derived when your premium payments are more than the cost of insurance, whereby, the excess goes into a cash value account and draws interest.

If you decide to surrender your life insurance policy, the insurer will pay you the cash value, also known as surrender value. You will, however, suffer a loss if you surrender your policy before the maturity period.

Surrender value of a traditional insurance policy:

Surrender value of a policy is the amount you would receive from the insurance company if you surrender the policy to the company before its expiry.

That is, if you want to discontinue (or cancel or terminate – it has different names) a policy before it matures, this is the amount you would receive from your life insurance company.

The surrender value is paid to you at the time of discontinuation of the policy.

The surrender value consists of a portion the premiums paid by you, plus any bonuses accrued.


The surrender value is calculated by the insurance company depending upon the time for which the policy was in effect (the age of the policy), the total duration of the policy, the premiums paid and any bonus accrued.

Surrender value also takes into account any accrued bonuses, but after reducing them by a factor called “surrender value factor”. The surrender value factor depends on the number of premiums paid and remaining.

The policy needs to be in force for at least 3 years before it attains a surrender value. That is, you need to have paid premiums for at least 3 years before you can surrender the policy. Thus, if you surrender the policy after say 2 years, you would lose the premiums paid.

The company may have a condition of minimum years before any bonuses are paid as a part of the surrender value.

In the initial years (say when the policy is 4-5 years old), the surrender value of an insurance policy is usually quite less. This is to discourage you from withdrawing early from your insurance, which is actually a long term contract between you and the insurance company.

Due to high initial costs, a traditional insurance plan does not have a surrender value in the first three years. 


The amount of surrender value will differ across insurance companies and depends on factors such as number of premiums paid and for how many years, full tenure of the policy, type of plan (money back, whole-life plan, endowment plan), and the bonus accrued on the plan.

Most insurers pay the guaranteed surrender value, usually equal to 30 per cent of all the premiums paid minus the first year’s premium, and all premiums in respect of optional rider, if any.

Insurers also offer a special surrender value, or a non-guaranteed surrender value, which depends on the sum assured, bonus, policy term, number of premiums paid, and is higher than the minimum guaranteed surrender value.

In a money back plan, the surrender value will be very low because money is paid to the policyholders in frequent intervals. 


Similarly, in a whole life plan, the maturity tenure is very long and, therefore, the surrender value gets reduced as you have to discount for a long period.

Compared with whole-life and money back plans, endowment plans have a higher surrender value. Most traditional single premium plans pay around 90 per cent of the premium as surrender value, excluding premium for optional rider and extras, if any.

Also, although, in case of single premium policies, the surrender value is accrued immediately, you get the money only after three years.

It is to remember that term insurance plans do not have any surrender value.

Surrender value of Ulips:

Unit-linked insurance policies (Ulips) are a combination of investment and insurance. The insurer will take into account the present net asset value (NAV), number of units left, sum assured and several other factors to decide the surrender value.

Since the major portion of your premium is deduced as charges in the initial years of an Ulip policy, it makes surrendering an Ulip before five years a loss proposition.

Since Ulips have a lock-in of five years, the surrender amount will only be paid after five years from inception of the policy and there will be surrender charges.

With the volatility in the stock market’s today, many who invested in a Ulip in the past one year, are seeing their fund value negative.

Many frustrated policyholders would be thinking of surrendering their plans. In such a case, where your fund value is negative, you should wait till the fund value improves. 

So, pay the premium for three years and then surrender. You can also make partial withdrawal  if allowed in the policy term and invest in some other financial instruments.

Also, remember that Ulips do not have a loan facility.

Using the option of taking a loan against your policy:

To get the loan value, one should know the surrender value, which is dependent on paid up value of the policy.

Paid up value:

Paid-up Value is the reduced amount of sum assured paid by the Insurer, in case the Insured discontinues payment of premiums. This is applicable only when the Insured has paid the premiums in full for the first three years.

1)In a money back plan, the surrender value will be very low as money is paid to the policyholders in frequent intervals 

2) In a whole-life plan, the tenure is very long and, therefore, the surrender value gets reduced as you have to discount for a long period 

3) Compared with whole-life and money back plans, endowment insurance plans have a higher surrender value 

4) Since Ulips have a lock-in period of five years, the surrender amount will only be paid after five years from inception of the policy 

5) In such a case where your see the fund value to be negative, you should wait, pay the premium for three years and then surrender 

Paid up value available at maturity or death = No of premiums paid x sum assured/number of premiums payable.

Unless, you are sure that you will pay back the loan on your policy within a year please do not take a loan.

Also, never take a loan on a paid up policy as you are not paying a premium. So, the surrender value of your paid up policy will not rise as fast as the interest on the loan.

Usually, the interest and the loan amount will become more than the paid up value of the policy in two years. As a result, the insurance company will cancel and forfeit your policy.

If you are sure of paying back the loan fast, then this option can be exercised as the interest rate is 9-10 per cent, compared with a personal loan, which will come at 15 per cent interest rate.

Your loan amount will be maximum 90 per cent of the surrender value.

Compulsory disclosure of overseas assets irks taxpayers

Filing of income tax returns has become more complicated from this year for those having bank accounts or any other assets overseas. The government has made it compulsory for Indian as well as expatriate resident individuals to disclose their overseas assets.

"The overseas assets will not be taxed, but it is an additional hassle for taxpayers," said Neeru Ahuja, partner, Deloitte Haskins and Sells.

Apart from the additional hassle, Ahuja said, expatriate resident individuals find it as an intrusion into their privacy.

"Many people are complaining. Expatriates who have come here to work even for a short period are required to disclose assets back home. It is an intrusion into their privacy," Ahuja told IANS.

The Central Board of Direct Taxes (CBDT) recently notified the new tax return forms for the tax year 2011-12 or assessment year 2012-13, mandating disclosure of foreign assets. In the tax return forms called ITR 2/3, a new section called 'FA' (Foreign Assets) has been introduced to disclose foreign assets.

As per the notification, individuals having taxable income exceeding Rs.1 million (nearly $20,000) and domestic and expatriate resident individuals with assets located overseas have to file their returns through the electronic mode.

"Resident individuals are required to file tax returns in India irrespective of whether they have income chargeable to tax in India or not," said Ahuja.

As per the Finance Bill 2012, resident individuals having assets, including financial interest in any entity located outside India are required to furnish tax returns electronically from financial year 2011-12 onwards giving complete details of such assets.

In other words, income is not the only criteria to file an income tax return in India now. Those resident individuals who have assets outside the country are compulsorily required to file income tax return, irrespective of whether they have any income generated in India or not.

The government has made disclosure of foreign assets mandatory in a bid to trace black money, which has become a big political issue in the country.

Although there is no official figure, some private research puts quantum of illicit money held by Indians to the tune of $1.4 trillion.

The government recently released a white paper on black money, but did not give any estimate.

The government argues that the mandatory disclosure of foreign assets is aimed at preventing generation and circulation of unaccounted money and tracking undisclosed assets.

However, such a disclosure could cause undue hardship to individuals, especially the expatriates' family who qualify as residents due to physical presence in India. For example, spouses of foreigners who work in India or Non- Resident Indians (NRIs) returning to India will invariably need to make disclosures of their foreign assets.

"It is not clear how the additional information may be used, but it will cause hardship to genuine tax payers," said Ahuja.

Courtesy-http://timesofindia.indiatimes.com/nri/other-news/Compulsory-disclosure-of-overseas-assets-irks-taxpayers/articleshow/13897750.cms