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 NAV
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?
- Avoid
it
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.
- Costs
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.
- Surrender charges
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.
- Performance
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.
- Other
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.
[sourse:http://www.morningstar.in/posts/32777/should-you-stick-to-your-ulip-or-surrender-it.aspx]
