Often many investors realize that they bought a Unit Linked Insurance Policy (ULIP) without knowing the various costs that go into the investment every year. They may have liked the insurance cover and the prospect of investment returns that the product promises to generate. An agent might have painted a rosy picture and shown tax savings that might accrue. As it happens with any product that is pushed aggressively by agents the end result and what is promised could be quite different. You might have thought it a beautiful ULIP but may have ended with a lemon!
Once the realization dawns, the decision to switch out is not easy. Most of us have a deep psychological aversion to a loss. Research by famous psychologies – Amos Twersky and Daniel Kahnemann also point out that the pain experienced in losing a thousand rupees is much higher than the joy one gets by gaining Rs 1000. Naturally, the common reaction is to avoid making the decision or postponing it endlessly, or indulge in analysis paralysis.
Whatever the ‘process’ the end sate is not favorable to the hapless investor. Chances are that the investor might be scared away or intimidated by the ‘industry’ when he attempts to get out of the investment. There is a fear instilled that he cannot break the lock-in, he might lose the entire money invested – these are plan lies and something that the investor should not be intimidated with. We cover a few key points here on how to get out of a ULIP if it has not worked for you. Insurance & Investment should not be mixed together. Doing so would be at one’s own peril.
Why should I Exit a ULIP:
The answer is quite simple. A ULIP is heavily loaded with commissions and various charges (covered below). Such a big reduction in the initial amount of investment means that it is next to impossible to achieve returns that can beat even an average mutual fund. For example, if various charges reduce your investment of Rs 100 to Rs 70, then getting to Rs 110 would be tough. Note that getting from Rs 100 to Rs 110 is a 10% return, which a decent Mutual Fund has been generating over the last decade). But getting from Rs 70 to Rs 110 means a 57% return which is extremely rare. As a result, your investment languishes and even after 10 years, you might notice that the returns could be poorer than even a Bank Fixed Deposit.
A Quick Guide to Exit a ULIP:
Let us demystify this and cover the thought process of getting out of a ULIP with 3 questions.
Should I wait till I recover my ULIP investment?
If you have held the ULIP for a few years, compare it with the returns an MF would have generated. If the gap is too big for your comfort then decide to get out of it.
What about the lock-in?
The lock-in is only a psychological factor to force people to stay on. If your surrender charges are lesser than the other charges then why stay? If the return gap vs a good Mutual Fund is too big.
What are the various types of charges levied in a ULIP:
- Mortality Charges: this is simply the life insurance premium you are paying.
- Premium allocation charges: quite frankly these charges are often given back as rolling commission to the agent who sold you the policy; these are also cover the overheads incurred by the Insurance company.
- Policy Administration charges: These are administrative charges.
- Fund management charges: This is to manage the funds and invest in various stocks and bonds as the Fund Manager deems fit.
To Surrender or Not?
Check the schedule of charges year wise. It is possible that the premium allocation charges and Premium allocation charges could be higher than surrender charges. If yes, then exit immediately.
What to do with the money redeemed?
Ensure adequate protection by buying term insurance
If your life insurance requirement was solely met by the ULIP, make sure that you purchase a Term Insurance Policy immediately.
Options for Section 80-C Income Tax Saving
There are several less leaky avenues (actually zero leaks!) to invest your hard-earned money and at the same time obtain Income Tax savings. These are the Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY) and Equity Linked Saving Schemes (ELSS). ELSS funds are also available in direct mutual fund platforms like Jama.co.in (look for “Tax Saver”)
The remainder of the funds
Invest remainder money in diversified and DIRECT mutual funds. Mutual Funds are a reliable way of investing in the growth of the economy at a reasonable cost. Make sure that you invest in the Direct Plans of mutual funds as they carry 0% annual commission. Unlike Regular Plans where 1% to 1.5% commission is compounded every year, you could end up making up to 30% – 40% more.
Conclusion
Getting out of ULIPs is not as tough as one can imagine. One has to overcome the fear loss aversion. It is always better to cut your losses and start afresh! Wake up and smell the fresh ULIPs!