I was talking to some of the premium service members in the last one month and majority of them have invested in Unit Link Insurance Policies (ULIP’s) and want to surrender old frontloaded ULIP’s. One of the members was so much frustrated saying his agent has miss-sold these ULIP’s without providing adequate knowledge about this. Though I agree this to some extent, the primary responsibility in choosing an investment or insurance product lies with the investor itself. Should you surrender your old frontloaded ULIP’s?
What are ULIP’s?
Unit Linked Insurance Plans (ULIP’s) are those which act as insurance + investment products. These ULIP’s would charge premium allocation charges + policy administration charges etc. up to 30% of the premium paid in the initial 1 to 3 years. Gradually the allocation charges would reduce to 2% from 4th year onwards. There are some ULIP’s which indicated that 100% of first year premium paid would be the policy administration charges. Means you are paying heavy premium allocation charges to insurance company for the first 3 years along with the risk of surrender charges. During Sep-2010, IRDA has made some changes to these ULIP’s guidelines and put a cap on surrender charge to Rs 6,000 for first year gradually reducing it to Rs 2,000 for the fourth year. From fifth year, you need not pay any penalty charges. If you are among the crowds who have taken ULIP’s prior to Sep-2010, then the 3 year lock-in period would ends by Sep-2013. Such investors have been re-thinking whether they should surrender their old front loaded ULIP schemes or whether they should continue.
Points to be noted before you think of surrendering your old frontloaded ULIP’s
1) Surrender Costs frontloaded: ULIP’s taken before Sep-2010 have charged heavy surrender / penalty costs. Means the costs are already front loaded in initial years from 1 to 3 years of policy term. If you observe, your fund value is very low comparing to yearly investment which you have done from 1st year to 3rd year. The premium allocation and policy administration charges are already reduced from your ULIP amounts. If you surrender such policies, you would lose the money. E.g. If you have invested Rs 100,000 per annum, for 3 years, your investment amount should have been Rs 300,000. However due to high premium allocation charges for first 3 years, your fund value after considering 10% return might be only Rs 2.4 Lakhs to Rs 2.5 Lakhs. You would be incurring Rs 60,000 to Rs 70,000 as loss if you surrender such policy.
2) What about your insurance coverage?
While you have taken the ULIP for both insurance coverage as well as investment purpose, before you pull out your ULIP you need to consider about insurance coverage. If you are in 50’s, getting a term insurance coverage now, would cost you very high. Also if you are an NRI, you cannot get online insurance policy. You need to keep these things in mind before closing ULIP’s
3) How is your ULIP fund performing?
If you observe, people talk about only hefty charges charged by insurance companies in initial years. What about the fund performance where you’re ULIPs have been invested? Ideally after considering all charges, the balance amount invested should provide good returns. The returns can range between 9% to 12% per annum. If your fund value indicates that it has provided lesser returns and is consistent under performer, you should think of surrendering your ULIP NAV. The period of performance can be checked for 3 to 5 years to arrive at this decision.
4) Zero refund for first year premium:
There are several ULIP’s issued earlier which contains a clause indicating that first year premium would be retained by insurance company for future benefits. Such benefits would be provided only if the insured would continue till the end of the policy. Means, if you surrender the ULIP policy in mid, you need to forgo your first year premium.
5) ULIP’s sold after Sep-2010 – 5 year lock-in period – Refund only after lock-in period
If you have purchased ULIP’s after Sep-2010, these are issued with 5 year lock-in period. If you want to surrender such ULIP’s purchased after Sep-2010, then you would not get your premium refund immediately. The premiums paid would be credited to discontinued policy fund and insurance companies would pay back your money only after 5 year lock-in period along with interest.
Conclusion: If you have purchased ULIP prior to Sep-2010, think of such surrender / frontloaded costs before surrendering them. If your ULIP’s fund is performing well, it makes sense in continuing the ULIP instead of booking the loss and re-investing in other insurance or investment products.