Most taxpayers are shifting to the new tax regime. They will not only pay less tax but also be free from the maze of deductions and exemptions. Taxpayers who made the mistake of buying life insurance only to save tax now have an opportunity to redeem themselves. Life insurance is the lynchpin of a financial plan and a well-chosen policy safeguards all financial goals of an individual. But traditional life insurance policies offer very low coverage of just 10 times the annual premium. They are mostly bought for saving tax, not financial protection.With no deduction available under the new regime, policyholders will not find them very useful. However, closing a policy prematurely has financial implications.Total loss for new purchases: Did you buy life insurance in the past two years? If a life insurance policy has not completed three years, all the premiums paid will be forfeited if the policy is prematurely closed. To many people, this may appear a losing proposition. Financial planners say losing 1-2 years’ premium is better than continuing a policy that will yield a return of barely 5-6% for the next 10-15 years. They say it is better to take that loss and invest the future premiums in more lucrative avenues.But there is another aspect that taxpayers must keep in mind when ending a policy prematurely. If you have claimed tax benefits under Section 80C, premature closure before three years could lead to a retrospective tax liability. The taxman will want you to pay up the tax you saved when you purchased the policy.50-70% hit for older policies: After you pay premiums for three years, an insurance policy acquires a surrender value. This surrender value is not very high. If a policy with an annual premium of Rs 20,000 per year is surrendered after the third year, the policyholder can expect to get back around Rs 18,000 (or 30% of the Rs 60,000 paid over three years). The surrender value increases with every passing year. It may be close to 40-50% if premiums have been paid for 10-12 years.Different rules for Ulips: The rules are different for Ulips. These plans have a mandatory 5-year lock-in period, but premature closure is not as painful as in case of traditional policies. If you stop paying the premium of a Ulip, the policy will terminate but the money you paid till then is not forfeited. The balance in the Ulip is moved to a discontinuance fund where it earns a minimal 4% per year and is returned to you after the five-year lock-in ends.Experts advise that if the policy is going to mature in 3-4 years, it is better to continue paying the premium and reap the full benefits promised under the plan. If the policyholder is finding it difficult to pay the premiums, it is best to turn the policy into a paid-up plan. You stop paying the premium but the policy continues to be in force, although the sum assured (the death benefit or maturity amount) are proportionally reduced.The reduced sum assured is better than surrendering the policy completely.
