All of us who have invested in ULIPs over the years have this question before us? In most situations ULIP have given below expected returns and you may tempted to think of cutting your loss by surrendering and investing the amount in other higher return investments. Let us therefore examine, whether it is good to surrender or continue with it till maturity.
What is ULIP?
Unit Linked Insurance Policy (ULIP) is a product offered by insurance companies that unlike a pure insurance policy gives investors the benefits of both insurance and investment under a single integrated plan.
How it works?
A part of the premium paid is utilized to provide insurance cover to the policy holder while the remaining portion is invested in various equity and debt schemes. The money collected by the insurance provider is utilized to form a pool of fund that is used to invest in various markets instruments (debt and equity) in varying proportions just the way it is done for mutual funds. Policy holders have the option of selecting the type of funds (debt or equity) or a mix of both based on their investment need and appetite.
Just the way it is for mutual funds, ULIP policy holders are also allotted units and each unit has a net asset value (NAV) that is declared on a daily basis. The NAV is the value based on which the net rate of returns on ULIPs are determined. The NAV varies from one ULIP to another based on market conditions and the fund’s performance.
Performance of ULIPs
ULIP is a market related instrument, and if the market does well so will be the ULIPs. However, research suggests that not all ULIPs have performed well and have given reasonable returns to the investors. Though the market is the primary reason for ULIP’s performance, it also depends on what charges and fees a ULIP deducts from your investments.
The common charges are Premium allocation charge, Top up allocation charge, Mortality Charges, Fund management charge, Policy administration charge, switching charge and surrender charge etc. Besides, the surrender value is calculated as Fund Value – Surrender Charges, where fund value is Total no. of units under the policy NAV of the fund chosen. However, these charges are not same for all ULIP, some charge lower.
Because of so many charges, the residual investment of any ULIP is not enough to give considerable return even if the market is doing well. Here lies the reason for dissatisfaction of investors like you, and you now want to get out of it. You, therefore, want to take such a decision.
Whether to Surrender ULIP Policy or Not?
| When Not to Surrender | When to Surrender |
| Some ULIPs have variable charges, high initially and then lower. In case your ULIP is such one and you have invested since sometime and the maturity date is near, stay invested. | Your Ulip has got ongoing regular charges, which will eat your premium and fund value. |
| The surrender charges are too high. If we wait for some more time, the surrender charges will come down. Once the surrender charges become low or nil, we can surrender. Till such time, we can wait | There is a low or no surrender charges. |
| Your Ulip is performing equivalent to the mutual fund performance even after the expenses. | If your ULIP is not performing well compared to similar investments like mutual funds. |
| If your health condition is deteriorated after taking this policy, you need not surrender. If you go for a fresh term insurance, you may not get the policy they may decline the fresh life cover because of the recently developed health issues. | If you find that other financial instruments like Gold ETFs, PPF, Banks FDs are giving higher return compared to what your ULIP has given, time to cut loss and get out. |
Life Insurance is not actually an investment product
Traditionally in India, life insurance product has always been looked as an investment product. One of the reasons is that despite financial planners have been recommending Term Life Insurance plans, they have not become popular.
To support this mindset, ULIP product was launched to satisfy investor outlook of insurance cum investment product. However, the fact is, most of the ULIPs have become poor performers because of the high charges and inherent under performance.
Hence what should you do? Don’t invest in Ulips. If you have already invested, pay a close look at your ulip and understand the current status of it. Based on the above criteria explained, you may choose to surrender or not to surrender.
(The author is Ramalingam.K an MBA (Finance) and certified financial planner. He is the Director & Chief Financial Planner of holistic investment planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He Can be reached at ramalingam@holisticinvestment.in)
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