Saturday, 6 February 2016

Is It Time To Get Out Of High-Cost ULIPs ?

As per estimates, aggressive unit-linked insurance plans (ULIPs) funds that allocate 100% to equities have earned average annualized return of 9.43% in the past five years against 9.24% delivered by the sensex during the same period.
However, these numbers only show the rise in the Net Asset Value (NAV) and don’t reflect real returns for the investors. Many charges are not taken out of the NAV but deducted by reducing the number of units.
Before the 2010 guidelines, insurance companies used to frontload the charges on these plans, making first few years costlier. But in some ULIPs, the charges continue to be high even after the pain period of initial years is over. In some cases, charges are as high as 6.77% a year. If you include the fund management charges, the total cost to the investor is nearly 7% a year. And if you take into account mortality charges, the total charges paid by the policyholder will be even higher. This means, a ULIP must grow by at least 18-20% to deliver meaningful returns to the policyholders.
Hence, if you are holding such a high cost plan, it may be the time to get rid of this investment. But go through the fineprint of the terms and conditions before you close it. There can be surrender charges on pre-2010 ULIPs.
After the three-year lock-in period, the premature surrender charge is close to 3-4%. This gradually comes down over the next three-four years but some policies charge 1-2% even in the fifth or sixth year. Only after seventh year onwards there is no surrender charge.
However, before you surrender the policy, be clear about how the proceeds will be deployed. There is no point in withdrawing the amount if you plan to blow it away. In that case, it is better to remain invested.
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