How To Review Your ULIP Investments Before Surrendering

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

Do you belong to a group of those people who bought a life insurance policy a few years back expecting it to deliver good returns and are regretting your decision since then cursing the sales executive who sold you a useless policy as the returns have not met your expectations?

If yes, then I’m sure you must have thought of doing something with your policy – either surrendering it or stop paying further premiums for it or consulting a financial advisor to discuss other alternatives before taking a final decision. Whatever you have done since then, I hope this article will help you in making further progress in the right direction.

First of all, there might be different reasons for different investors to explore the option of discontinuing their life insurance policies. Some of them are:

1. Unsatisfactory performance of the current life policy, as it was initially sold to you by a sales executive/relationship manager showing a very rosy picture or you bought it with a very little understanding

2. Not making financial sense to you anymore, as you have become more financially literate now and with better understanding of the markets and the products you have a view that ULIPs are not for you

3. ULIPs are too complicated for you to continue, as you don’t understand the various kind of charges involved in it, where your money is getting invested and other things involved in ULIPs

4. Availability of better investment options like mutual funds, gold or real estate and you have a shorter term horizon to invest

Options available to you

  • Surrender the policy and withdraw the whole of the Surrender Value or Fund Value
  • Stop paying further premiums, withdraw majority of the invested amount, keep the policy running and enjoy the life cover. This option is available only with old ULIPs.
  • Get the policy fully paid-up (in case of traditional policies)
  • Do a self-assessment (be your financial advisor for your investment)
  • Keep paying the premiums as you are convinced ULIPs outperform Mutual Funds in the longer run.

Before we move any further, we first need to understand the various charges attracted by these ULIPs. You can check these charges applicable to your ULIP in the “Sales Benefit Illustration” or the product brochures. A sales benefit illustration illustrates various charges, year by year, for the term of the plan so that you know where your money is exactly going, how much money is deducted as charges and what is finally getting invested. Here is the link to check a sample of a sales benefit illustration:

1. Premium Allocation Charges – These charges account for the initial expenses incurred by the company in issuing the policy e.g. cost of underwriting, medical tests and expenses related to distributor/agent fees. These are deducted upfront from the premium either annually, half-yearly, quarterly or monthly depending on the frequency of the premiums.

2. Mortality Charges – These charges refer to that part of the premium which goes towards the death benefit and are recovered by cancellation of units on a monthly basis.

3. Policy Administration Charges – As the name suggests, these are administrative charges and are recovered by cancellation of units on a monthly basis.

4. Fund Management Charges – These are the charges incurred to manage the investment portion of your premium and vary from fund to fund depending on the percentage of equity component in the fund.

5. Surrender Charges: These charges are deducted for premature surrender/termination of a policy and are capped at 15% from September 1, 2010.

Surrender Value: It is the sum of money an insurance company will pay to the policyholder in the event he/she voluntarily terminates or surrenders the policy before its maturity or the insured event occurring. In other words, it is the amount payable to the policyholder should he/she decide to discontinue the policy and encash it. This cash value is the savings component of most permanent life insurance policies, particularly whole life insurance policies. This is also known as ‘cash value’ and ‘policyholder’s equity’. The life cover provided by a life insurance policy ends with its surrender as it effects a termination of the contract between the insured and the insurer. Surrender Value = Fund Value – Surrender Charges

Fund Value: The value of the investment portion of your life insurance policy is known as Fund Value. Till the time surrender charges are applicable in ULIPs, surrender value is calculated by deducting the surrender charges from the fund value. Fund Value is paid in full once the surrender charges cease to exist, usually 5 years in new ULIPs. Fund Value = Total no. of units under the policy * NAV of the fund chosen

Let us also take a look at the rules that have been there before and after an important date in the history of ULIPs.

Rules governing ULIPs bought before Sept 1, 2010

Lock-in period of 3 years: Policies taken before September 1, 2010 used to have a lock-in period of 3 years only, after which you were allowed to surrender your policy and take away the fund value after getting the surrender charges deducted.

Surrender Charges: Surrender Charges used to continue after the lock-in period of 3 years. In some policies, these charges continue even after 5 years.

Minimum Premiums Payable: Three

Cover Continuance: This feature was available in older ULIPs wherein you were allowed to continue with the policy even after paying premiums only for the first three years. Your money remains invested in your choice of fund option and the mortality charges will be deducted to maintain the life cover. This was due to mis-selling by intermediaries. Life cover continues even after you surrender the policy or stop paying policy premiums.

Charges: Charges are relatively higher.

Rules governing ULIPs launched on or after Sept 1, 2010

Lock-in period of 5 years: The so-called New Ulips, which have been launched on or after September 1, 2010, carry a lock-in period of 5 years i.e. you’ll get the fund value only after 5 years if you’ve paid the premiums for all the 5 years. If you surrender the policy without paying even 5 premiums, then also you’ll get the surrender value only after 5 years but in that case your money will earn only 4% p.a. interest.

Surrender Charges: Surrender Charges cannot be levied after the lock-in period of 5 years if the policy term is 10 years or less and after 6 years if the policy term is more than 10 years. If you surrender after paying only the first premium, the maximum surrender charges as per IRDA can be Rs. 3000 (for premiums up to Rs. 25000) or Rs. 6000 (premium above Rs. 25000).

Minimum Premiums Payable: Five

Cover Continuance: The new ULIPs don’t offer this feature. If you stop paying premiums after the lock-in period, the policy will be discontinued and the value will be returned to you. Life cover ceases once you surrender the policy or stop paying policy premiums. It was one of the best features with the older ULIPs but I fail to understand why it has been removed from the new ULIPs altogether. The agents used it extensively to mis-sell ULIPs by telling their clients that they just need to pay only three premiums and after that they can either withdraw the investment or the life cover will continue even they don’t pay further premiums.

Charges: Charges are relatively lower

What to look for before surrendering your policy – step by step process:

  • Check whether the policy is bought before or after September 1, 2010
  • Check the various charges deducted till date: “Premium Allocation Charges”, “Mortality Charges”, “Policy Administration Charges”, “Fund Management Charges” etc.
  • Check the Surrender Value or Fund Value by making a call to the customer care centre or online logging into your account
  • Check the various charges to be deducted in the forthcoming years and do a self-assessment to decide whether the charges are justifiable for you to continue with the policy
  • Do a background check of the fund manager before you continue with your existing ULIP – who the fund manager is and what is his/her qualification? How long has he/she been in the fund management business and how has been his/her performance history?
  • Compare the performance of the fund vis-a-vis some of the good performing diversified mutual fund schemes over a period of one year, three years, five years and since inception. ULIP returns should be easily available on the company’s website. If the fund is underperforming consistently, you should seriously consider discontinuing the policy.
  • Compare the mortality charges of your ULIP with a good term plan with the same Sum Assured. Newer ULIPs usually carry high mortality charges as they don’t come under the cost caps, which gives insurance companies an opportunity to have a high margin on the mortality cost. It is most likely that the term plan would be offering a cheaper option to cover your life. If that is the case, then I think you should get your ULIP discontinued by encashing the fund value.
  • Take the help of a financial planner in case you are not able to understand the charges or the performance of the funds before taking final decision.

Reasons why you should not surrender your ULIP:

Most of the older ULIPs either carry very high costs in the initial years or have steep surrender charges or both. It is only in the later years that charges become somewhat reasonable and more money gets invested. So it would be a bad idea to surrender ULIPs with high costs in the initial years and a penalty for discontinuance.

There are a few old ULIPs, in which the policies carry surrender charges almost till the end of the policy term. You need to check your policy, the surrender charges involved in it and then decide whether it is worth surrendering or keep the policy till its maturity.

If you have taken one of the old ULIPs, then your life will remain covered even without paying further premiums with the “Cover Continuance” feature. In that case, if the mortality charges of future years are reasonable, then you may stick to your policy and hope the fund is managed in an efficient and professional manner.

As I mentioned earlier, you should not surrender ULIPs if you are convinced ULIPs outperform Mutual Funds in the longer run.

Reasons why you should surrender your ULIP:

There is lack of transparency in almost all sections of their workflow.

Fund managers of almost all ULIPs have failed to deliver and there is no certainty whether they will be able to deliver in the future years also.

Premium Allocation Charges will remain quite high in future years also which eat up a significant portion of your principal investment.

Term plans are the best insurance plans to get your life insured.

It is better to invest in investment avenues like mutual funds, Gold ETFs, PPF etc. or to pay-off any of your loans which carry a higher rate of interest than your ULIPs will deliver.

Documents you need to submit for policy surrender:

  • Policy surrender form – it should be easily available on the company’s website
  • Policy bond
  • A self-attested copy of your ID proof
  • Any cancelled cheque or bank attested bank statement or bank attested passbook copy for fund transfer

I have a personal view that one should never mix his/her investments with insurance. But, if somebody has already done that then the best option is to try not to surrender the policy in a real hurry, keep it alive as long as possible, study all the features and charges of your policy thoroughly and reap the maximum benefits out of it. It is generally advisable that you should wait for a longer period before surrendering your policy, as this will ensure the higher initial charges are spread out. But, if after doing the extensive research, you have decided to surrender the policy, then you should visit the nearest branch office of the company to surrender your policy along with the above mentioned documents.

86 thoughts on “How To Review Your ULIP Investments Before Surrendering”

  1. hello Sir,
    I have purchased ULIP from hdfc..I am paying all my installments from my NRE a/c..My question is how the payment will be done after maturity of my policy..whether they will be able to credit it to my NRE a/c or I have to open NRO a/c for same..thx in advance..

  2. Hi Sir
    I have recently purchased ulips from bajaj in dec 2014.i have paid first quarterly installment.now second installment is in march.it is invested in future gain and isecure. Pure stock fund,acc mid cap, equity gr, asset allocation.can i surrender these ulips.will i be in loss.or should i wait till lock in period and then surrender.
    Please suggest me. Thank you.

  3. Hello sir
    I have max amsure secure returns ulip plan which i bought in 2007 nd the premium is 25000/month.i hav paid premiums till now….wen contacted max customer care i jst get 2 know that after all dat years my total amount is 210000…so wat shoul i do??stay or leave

  4. Hello Shiv,

    I have a ICICI ulip policy which I bought in 2007 and paid premium Rs. 20000/- for 4 consecutive years and then stop paying premium for the same. Policy is running as cover continuance status. Now again I want to make premium for last 2 year i.e. Rs 40000/- in current financial year and approx 4% charge will be levied from premium as charges. Just want to know 1) can I claim 40000 in this finacial year. 2) when I can withdrawl the amount. 3) at withdrwal income will be tax free or not?

  5. Hi Shiv,

    I purchased one ULIP policy from ICICI in the year 2009.
    Now if I surrender the policy how the tax will be applicable on the Surrender Value.
    The entire Surrender Value will be added in the taxable income or only the gains?
    How can we save this tax.

    Regards,
    Mukesh
    9881233904

  6. Thanks for the article which i read after i lost my money in LICs Jeevan Plus single premium policy (ULIP). I was lured & fooled by one of their agents in 2007 to put in my retirement money of Rs. 2.00 L in to this policy .. I bore the medical examination fees from my pocket. It was taken for 40 years and the assured amount was Rs. 10.00 L.
    LIC informed me last year that the units available were not sufficient to maintain and that the policy had expired. I went to their office and was advised to surrender the policy and I got Rs. 1773/- !!!!!!

    Can you pls advise me whether the difference between the purchase price of Rs. 2.00L and Rs. 1773/- I received can be treated as capital loss as per IT act? If this is possible, some salvation for my stupidity !!

    Regards
    9845006850

  7. Automatic Investment plan -Reg
    Sir, I have brought above policy dt 30/11/2008 its maturity period is 30/11/2018,

    I paid premium for three year locking ( 2008, 2009 and 2010).

    Still I am not willing to close my policy but they told that it is lapse for not paying for 2011,12,13 and 2014

    1) Shall I collect cheqe ?
    2 ) Is it taxable after six year from( 2008 -2014 )?

    Thanks in advance
    Shivaji

  8. Dear Shiv,
    My father had purchased one ulip policy of bajaj allianz equity growth fund in 2007 and paid premium for 3 years for Rs. 10000/- per year totaling to Rs. 30000/- but recently i have received cheque of rs. 11273/- as foreclosure amount and surrender value when i have seen statement since then i am in confusion can you please help me out whether it is correct or not. Please reply me as soon as possible

  9. Hi Shiv

    Thanks for such an informative post.

    I have a Jeevan Saral LIC policy, which I’m thinking of discontinuing given the fact that it isn’t adding any value to my investments. I have already completed my lock in period of 3 years, which an annual premium of 72k.

    Could you please advise will it make sense the surrender the policy at this stage? I much money should I expect to be deducted? I recently contacted my agent who informed that I’ll only be getting 1/3rd of the total premium paid, which sounds fishy.

    Could you please help me out here?

    Thanks
    Rahul

  10. Dear sir,

    I had invested 1 lac in SBI Life ulip n i had not claimed deduction under 80c.now i have surrendered the policy n i got 93000,i.e., i made a loss of 7000.can this loss be deducted as capital loss against income while filing income tax returns?….thanks,shekar

  11. i want to add one more query, my policy is kept with bank against loan can i do partial withdrawl

  12. hi, shiv

    I have taken ICICI Lifetime super ULIP policy, (life cover for 20years). agent told us that this is free cover of 3,00,000 for 20years. I have paid 3 premium of 25000 each(that is required to pay). my policy is currently active. Now I m in urgent of fund so I decided for partial withdrawal/surrender, ICICI is now saying that I have to surrender my policy then only I can withdraw my funds and life cover will be discontinues. Please advise

  13. I purchased one Ulip from Bajaj Allianz in the year 2007 with a premium of Rs. 10000 per year. I paid the premiums till 2010 and claimed tax deduction (Total premium paid 40000). Currently its Fund value is Rs. 44221 and surrender value after deducting the 47.15% of first year balance units is Rs. 39000. So overall loss of Rs. 1000. if I surrender my policy in the Financial year 2014-15, do I need to submit the revised tax returns for year 2007-08, 2008-09, 2009-10 and pay tax on the same. if I wait for 1 more year, do I still need to fill the revised tax returns?

  14. Dear Shiv

    I have purchased LIC MARKET PLUS TABLE 181 on 30 Sep 2006 by paying a single premium of rs 6 lakhs without sa or life cover

    I have surrenderd this in may 2013 and got rs 7.97 lakh
    is the amount 1.97 lakh taxable. pls advice.
    I have not done any tax dedctuion of Rs 6 lakh under 80c in 2006

  15. Hi Shiv,
    Great Article. But still I need ur help to clarify my doubt regarding tax implication.
    I have taken ICICI Lifetime super ULIP policy (regular policy , not a pension plan) in January 2007. I have paid premiums till January 2013 regularly ( total 07 premiums of 25000/-). Also I have claimed TAX deduction in respective years ( till FY2012-2013)for the premium paid against Sec 80C.

    Now, I want to surrender my policy ( premium payment is due for Jan2014, but I am not going to pay). My query is, surrender amount will be taxable or not?

  16. If one Discontinues his ULIP policy before the Lock in Period, he receives it back after the Lock in Period along with min 3.5 % interest . I wanted to know – Does one have to pay any tax (to govt) on the Money that will be received back from the Company after the Lock in Period as it includes 3.5 % interest that the Company Pays to us ?

  17. Hi Shiv,

    Thank you for such a nice article. I wish I had done the research before investing in an ULIP.
    I invested in HDFC’s ULIP 2 plan in 2009 with a sum of 20000/- per annum (10000 semi-anually). I was shown a very nice picture about the plan minus the hidden costs. Till now I have invested Rs. 100000/- (5 years) but the current value shows paltry Rs. 89000. I feel like lost because when I had started, even 20K per annum was a big amount for me.
    Now I have started doubting if I should remain invested and will I get even the actually what I have given them or should I surrender? Please advise.

  18. Hi
    I had invested in a ulip policy with reliance ( Product Name: Secure Child (Regular) )…its been 5 yrs now the total invested amount till date is 250000..iam in need of money is it a good idea to surrender the policy now ( its value now is 275000…) ..Please advice

    Thanks
    Vivek

    1. Hi Vivek,

      It is not possible for me to give an advice on your ULIP investment without analyzing it. Please get it analyzed from an unbiased financial advisor before taking any decision.

  19. Hi Virendra,
    ULIPs (or insurance plans as such) are not good from investment point of view. Their charges are quite high, non-transparent and complicated as well for a common investor. NAVs are calculated based on the performance of the asset classes the funds are invested in. If your view is that the debt portfolio of your ULIP is going to perform better than the equity portfolio, then you should switch to the debt option, otherwise not. Withdrawal is also your choice, because personally I think ULIPs are not good investments but at the same time it is very painful to come out of them as they are better to be termed as ‘Chakravyuh’.

  20. i have 40k annual investment in market plus 1 growth fund.i paid 3yrs and stopped paying. i am unhappy with its nav.so i thinking of switching fund to bond because its show good nav.is it good idea?will this affect my return or units.what loss i will have?
    pls let me know the earliest.and also is it fine if i withdraw in next 1 year as i have purchased in dec 2009 and paid premium to dec 2012

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