Should you surrender your old frontloaded ULIP’s?

Should you surrender your old frontloaded ULIP’sShould you surrender your old frontloaded ULIP’s?

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?

Also Read: How much life insurance do we need?

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’s.  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.

You may also like: How to choose best term insurance plan

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.

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Suresh
Should you surrender your old frontloaded ULIP’s

Suresh KP

29 comments

  • zubin

    Hi Suresh

    I am your regular reader and took advise from you on mutual funds. This time i have a query with regard to my investment in ULIP. I had invested in MET Easy Plus policy on 9th August 2010. Premium amount is Rs.25,000 in which I am getting a cover of Rs.250,000.

    Just like others even I conned to take this policy at that moment (thanks to one of the bank manager who forced me in to it in order to sanction my loan). 

    I have paid 3 installments of Met Easy Plus amounting to Rs.75,000. The 4th installment is due on 9th August 2013. The NAV as on date is 11.29040 for 5168.86004 units amounting to Rs.58,538.49740 (fund value)- plan selected of investment is Multiplier II- 100% equity.

    I spoke to Metlife call centre to understand surrender rules and they say that since I would complete 3 years period lock is period would not be applicable from 9th Aug 2013. Surrender charges would be 25% of the 1st installment paid (25% of 25,000) plus service tax amounting to around Rs.7,000. So I would get Rs.58,358.49740-Rs.7,000= Rs.51,358 against Rs.75,000 invested and new installment of Rs.25,000 which I need to pay immediately (So around Rs.100,000 investment).

    Investment plan can be selected- there are 6 plans to bifurcate investments. I have now changed the investment to Govt Bonds and Debt funds(50% Protector II plan and 50% Preserver II Plan) since my current plan (Multiplier Plan) gave return of 9.7% in one year and around 3.2% CAGR for 3 years. Govt securities and debt funds are giving returns of around 12% for 1 year and 10% CAGR for 3 years.

    I am confused now as to what I should be doing with this ULIP plan. Should I surrender this policy and exit immediately or do i continue with this policy and try my luck with new plan of debts and government securities? 🙁

    Link for policy is: http://www.metlife.co.in/Downloads/Brochures/met%20easy%20plus.pdf

    Link for Fund return update is: http://www.pnbmetlife.com/Downloads/Fund/Monthly/2013/MetInvest_ULIP_July13.pdf

    Please help me figure out this confusion. I am also holding LIC Asha Deep II policy paying premium of Rs.19,205 per annum for Rs. 500,000 cover and also got mediclaim policy with United India Insurance of Rs.8,500 premium for Rs.10 Lac cover.

    Thanks in advance

    Zubin

     

    • Zubin, Please do the following: 1) Check with Metlife what would be annual charges to continue such ULIP. Say e.g. if they charge more than 2% to 3%, then it could be negative point. 2) Investing Rs 75,000 and getting only Rs 51,000 as refund amount is sad part. Thought it has become common in such ULIP’s, there are some alternatives. 3) You hv a risk coverage of Rs 2.5 Lakhs. You can spend in less than Rs 2,000 to get coverage for such amount through any of the insurance by taking term insurance. Balance you can invest in safe deposits or mutual funds or any other investment options generating 10% to 15% returns. 4) Though this decision may be hard, but you would continue to loose your investment in ULIP’s and end of the day, it is risk coverage is what you are getting nothing more than that. 

      • zubin

        Hi Suresh

        Thanks for replying back. I shall inquire about ULIP charges first thing in the morning. 

        But there is a catch for surrendering the policy. I need to complete 3 years. 3 years would be completed on 9th Aug 2013 which is also the last date for my 4th installment 🙁

        I am afraid that if I do not pay this premium amount and post which I surrender my policy they may deduct penalty amount for such default?? 🙁

        Or do I pay 4th installment and during the year end say around January 2014 I surrender the policy? Please advise..

        • zubin

          I just went through the policy document and following are the charges:

          (A) Premium Allocation Charges: 
          This is a premium-based charge. After deducting this charge from your premiums, the remaining premium is invested to buy units. Premium allocation charge will be deducted from the premium received as a percentage of odal premium as shown below:

          Coverage Term        Year 1        Year 2-5   Year 6 +
          20 years                   25%             2%          2%

          (B) Policy Administration Charges:

          The following policy administration charge would be deducted by cancellation of units on a monthly basis:

          Annualized premium 
          bands for Sum Assured               Year 1      Year 2 & 3       Year 4 +

          Multiple of 10 times

          Silver < 50,000                              2.50%           1.50%           0.43%

          The Policy Administration Charge would be deducted from the Unit-Linked 
          Fund in the beginning of each month by cancellation of appropriate number of 
          unit from the Fund Value. The Policy Administration Charge will be subject to a 
          cap of Rs. 750 from Policy Year four onwards.

          (C) Mortality Charges:

          Mortality charge will be deducted at the beginning of each month by cancellation of an appropriate number of units at the relevant Net Asset Value. Mortality charge will be based on the Age of the Person Insured, Cost of Insurance (CoI) and the applicable Sum Assured. The calculation method will be as follows:
          Mortality Charge = (Sum at Risk/1000) * Cost of Insurance (CoI)
          The Sum at Risk is defined as the Death Benefit (as defined in the Benefits 
          section) Minus the Fund Value (relating to Regular Premium Account).

          The Sample monthly Cost of Insurance per 1000 Sum at Risk are as below:

          Age/Gender                   20 years    30 years    40 years
          Male                             0.118533   0.136558    0.250833

          I am 28 years old so i think around 35 bucks per month= Rs.420 approx p.a

          (D) Rider Premium Charge:

          The Rider Premiums are not deducted from Fund Value and are payable in addition to the regular premium. Service Tax and Education Cess on Rider Premium will also be applicable at the prevailing rates at the time of payment of each premium.

           

          These charges are adjusted while calculating the Net Asset Value of the Unit-Linked Funds each day. Following are the applicable charges for different funds. 

          Fund Option Charges
          Preserver II: 1% p.a
          Protector II: 1.00% p.a.
          Balancer II: 1.15% p.a.
          Virtue II: 1.25% p.a
          Multiplier II: 1.25% p.a.

          I have selected preserver and protector plan so 1% charge on 25000 which is Rs.250 p.a.
          Now i realise charges are hefty!!! no wonder i am getting only 58000 from 75000 🙁 what is your take on this?

          • Zubin, You are able to give complete picture of your policy. All ULIP policies are like that. Problem is we by oversight may not see them. Insurance brokers would just dump them on us without giving complete picture. 

        • Check what are the surrender charges. If they are small, you can proceed. 

          • zubin baisiwala

            Surrender Charge as a % of First Year Annualised Premium

                                                                                 Policy Year
            Number of Annualized Premiums paid         1 – 3      4         5        6+

            Less than one Annualizedpremiums paid     100%   100%    0%      0%
            More than or equal to one but less than 
            two Annualized premiums paid                   100%     35%    30%     0%
            More than or equal to two but less than 
            three Annualized premiums paid                 100%     30%     30%     0%
            More than or equal to three but less than
            four Annualized premiums paid                    N.A.      25%     25%     0%
            More than or equal to four but less than 
            five Annualized premiums paid                     N.A.      20%     20%     0%
            More than or equal to five premiums paid 
            Annualized                                                 N.A.      N.A.      0%      0%

            Does it make sense to surrender after 5 years so that no surrender charges are applicable? or do i surrender now pay 7000 surrender charge to get only 51000 against 100000? 🙁

          • You got it right. This is the reason I say you should go thru the documents before taking any decision.

  • DYV

    Hi,

    I have taken HDFC Life Crest SL in Oct 2013.

    My fund value is at 95% of my first premium.

    What should i do? Can i rely on HDFC Life performance for 10 yrs?

     

    • Dhruv, I think the date is Oct-2012. As i said in article, it would be difficult to see the fund value within 1-3 years. If you are confident, you should wait for some time before taking a decision

  • narinder

    Hi, I have bought Max ULIP on march 2009 , 4200 p.m.

    Total amount invested till June 2013 is 214,200 and fund value is merely 216,000.

    Do you think I should continue it or not?

    • Narinder, All the initial allocation fees is done within 3 to 5 years. Since you alraedy completed 4 years, majority of allocation should have been over. Ask you max life agent of company to give NAV Statement if you have not received it. If the fund performance is good and generated 10%+ per annum (check for atleast 2-3 years performance), you can hold it. If it has generated < 6%, you can re-visit such investment

  • Sridhar

    Hi Suresh, Thanks a lot for your views.

    I am having one query. I have taken HDFC Life Pension Plan. I have paid for 3 years and after that I have decided to not to further continue the premiums and now it is in Paid Up.

    My Query here is I would like to know which fund option and the % allocation I have to choose from the below. ( Would like to go with Moderate risk )

    The below options are there.

    1) Liquid Option

    2) Stable Managed Fund

    3) Secure Managed Fund

    4) Defensive Managed Fund

    5) Balanced Managed Fund

    6) Equity Managed Fund

    7) Growth Fund

    Please share your valuable inputs on this.

    Thanks

    Sridhar

     

     

     

     

     

    • Sridhar, When you invest in pension plans, my feeling is to look for growth fund along with security. Since pension plans invest in secured method, I expect that it would be taken care by pension company and i would opt for growth plan. People have different views that we can also go for balanced and defensive funds as they would help you in protecting capital under falling markets. But if you are taking this at young age and taking this plan for longterm, I feel these would be taken care in long run.

  • Kishore

    Hi Suresh,

    Thanks for the information. I purchased Birala SunLife Insurance wealth secure plan in last month for a period of 5 years investing 36,000 every year and opted the investement as enhancer (80% investement in debt and 20% in equity (mid cap and low cap)).
    As I don't have the insurance policy till now I purchased this ULIP which will cover insurance and returns.

    My decision is not to surrender this policy after the maturity and want to continue for a long period. Insured amount is nearly 7.7 lac.

    Please comment on my decision wheter I'm going in a correct way.

    I've also another policy with LIC – JEEVAN SARAL – 15 years.

    In this scenario I've to take term policy? else can I wait for some more years to take term policy?

    My age is 28 now and earning 6.0 LAC per annum.

    Please guide me.

    Thank you

    Kishore

    • Kishore, It would depend on how much insurance you require. e.g. if you have monthly expenses of Rs 20K per month. Your early expenses would be Rs 2.4L. Assuming that your family would require insurance coverage of expenses for 12 to 15 years, then the amount required is Rs 28L to Rs 36L. If you have sufficient coverage for this amount, you can revisit this after a few years. Else consider taking term insurance for the difference.

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