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 firstname.lastname@example.org
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 Iâ€™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 donâ€™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 â€œSales Benefit Illustrationâ€ 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 valueâ€™ 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 youâ€™ve paid the premiums for all the 5 years. If you surrender the policy without paying even 5 premiums, then also youâ€™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 donâ€™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 donâ€™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: â€œPremium Allocation Chargesâ€, â€œMortality Chargesâ€, â€œPolicy Administration Chargesâ€, â€œFund Management Chargesâ€ 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 companyâ€™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 donâ€™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 â€œCover Continuanceâ€ 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 companyâ€™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.