This article has been written by Ramalingam K, director and chief financial planner at Holistic Investment Planners.
Most investors in ULIPs have battled with this issue at one time or the other. In most situations, the investment has delivered below-expected returns prodding the investor to cut his/her loss by surrendering the policy and investing the amount elsewhere.
Traditionally in India, life insurance has always been looked open as an investment product. It is for this reason, despite financial planners recommending term life insurance plans, they have not become popular.
To support this mindset, ULIPs were launched to satisfy the investor needs of owning an insurance-cum-investment product. Unfortunately, the fact of the matter is that ULIPs are poor performers due to high costs and inherent under performance.
Costs and Performance
Being an integrated plan, a ULIP combines insurance and investment. A part of the premium paid by the policy holder goes towards the insurance cover, while the balance is utilised for investments. As far as the latter is concerned, the money is pooled together and invested in various in equity and debt instruments in varying proportions, just the way it is done for mutual funds. The policy holder has the option of selecting the type of fund (pure debt or equity, or a blend of both).
Policy holders are also allotted units with each unit having a net asset value, or NAV, declared on a daily basis. This NAV is the value based on which the net rate of returns on ULIPs are determined. The NAV depends on the investments made and the market condition; in other words, the fund’s performance.
Being a market related instrument, the state of the market has a big impact on the performance of the fund. 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 fees are levied. The common costs are premium allocation charge, top-up allocation charge, mortality charge, fund management costs, policy administration charge, switching costs and surrender costs.
Besides, the surrender value is calculated as fund value minus surrender charges (fund value = total number of units under the policy x NAV of the chosen fund).
However, these charges differ amongst ULIPs.
Due to these costs, the residual investment of any ULIP is not sufficient to give considerable return even if the market is doing well.
What should you do?
If you have never invested in ULIPs, don’t.
If you already have, take a close look at your current investment. Based on the criteria below, you may choose to surrender or not.
Some ULIPs have variable charges, high initially and then lower. In case your ULIP is one and it has been years since you invested and the maturity date is not too far off, stay invested.
If your ULIP has got ongoing regular charges which will eat your premium and fund value, then you could surrender the policy.
It could be that the surrender charges are too high if you surrender the policy right away. If you wait for some more time, they would come down. Once the surrender charges get low or are nil, then go ahead.
If there is no surrender charge, or it is low, then you can go ahead.
If your ULIP is performing well post expenses, then there is no need to exit. If your ULIP is not performing well compared to similar investments such as mutual funds, then you could consider surrendering.
Also look at other financial instruments such as Gold ETFs, PPF and bank fixed deposits to see whether they are giving higher returns compared to what your ULIP has given. If yes, then maybe it is time to cut your loss and get out.
If your health condition has deteriorated after taking the policy, it is best not to surrender. If you opt for a fresh life cover, the company may decline the policy based on the recently developed health issues.
