If you are among those who had invested in a unit-linked insurance plan before 2010, your three year lock-in period may be about to end. So should you surrender your policy or continue to hold on? If you cash out, what do you lose?

Do the math

The unit-linked insurance plans (ULIPs) that were issued before September 2010 (when IRDA cracked down on ULIPs and limited their excessive charges) were front-loaded with expenses and relatively small sums going towards investments, in the initial years. Also, they levied a heavy surrender charge on policies discontinued before five years; these could be as high as 40-50 per cent of the annual premium. So, if you hold a pre-2010 ULIP where you have completed the initial three years, going by pure numbers, it actually pays to stay on. Consider these numbers:

Suppose you (age assumed is 30 years) have a ULIP and you have paid Rs 50,000 as premium annually in the last three years. At a gross return (yield) of 10 per cent a year, your fund value at the end of three years would be around Rs 1,32,000, post the usual charges. However, if you surrender the policy, you will get only a sum of Rs 1,08,000 on hand (fund value less surrender charges). Effectively you will be left with a capital loss of 28 per cent.

Case 1 : If you invest this sum along with a new investment of Rs 50,000 every year in a mutual fund earning a gross return of 10 per cent, at the end of 17 years, you will be left with Rs 21.03 lakh. Mutual funds usually charge an annual expense ratio of 2.5 per cent.

Case 2 : Suppose you continue with the same ULIP, the fund value at the end of 20 years would be Rs 24.7 lakh, assuming the same gross return. You also get the term cover benefit. This is because charges over the next 17 years on the ULIP are likely to be lower than those for the mutual fund.

Therefore, if you have already suffered high charges, you essentially treat it as a sunk cost. By staying with the ULIP, you get to make good those costs with lower expenses in the remaining period of your investment. But there are exceptions to this.

Performance matters

Before you make up your mind, run a check on the fund performance. If your ULIP is grossly underperforming its benchmark, you would be ill-advised to sink more money into it every year. Here what matters is a fund’s returns against its benchmark, rather than its absolute numbers. To cite an example, Bharti AXA’s Build India Fund has earned a 1.72 per cent return since its inception in 2010. Its benchmark index has managed 5.53 per cent in the same period. ING Prime Equity fund, launched three years ago, has given a return of 0.17 per cent since start even as its benchmark has risen 2.9 per cent.

So, to know if your ULIP is keeping up with its benchmark, check for information on its performance in the insurer’s Website. You can find details in the latest newsletter or fund update from the company.

Not all insurers have updated information on NAV. Going through websites of insurers, Business Line found that while some insurers didn’t have archives on their fund’s NAV from inception, some didn’t declare the benchmark’s performance. Now, how does an investor gauge the fund’s performance?

Talking to the insurance regulator- IRDA, we found that policyholders may still have recourse. They can demand the return numbers from their insurer and needn’t stay silent if their query is not answered. They can call Grievance Cell of IRDA and register their complaints or call the number- 155255.

Making the decision

Now, after weighing the pros and cons, if you decide to let go of your ULIP, these are some options you can consider:

One, if you are worried about the surrender charges, wait for the ULIP to complete five years. After the fifth year, surrender charges are nil in most policies and you can exit with a relatively better return.

Two, you can make the policy paid-up. This, Sanjay Tripathy, EVP and Head-Products, HDFC Life, says, would mean that you stop paying yearly premiums after the lock-in period but keep the fund in force.

“The customer here will continue to receive all benefits of the policy even after he stops paying premium after the initial three years. He will get the full life risk cover till there is sufficient fund value”. However, don’t try this if you are holding a ULIP that was launched after September 2010. The new ULIPs can’t be made paid-up, they can only be discontinued, adds Tripathy.

“In the new ULIPs, if a customer stops paying premium before completion of the fifth year, the amount in the fund as on the date of discontinuance less any applicable charges is moved to the Discontinued Policy Fund. The amount in this fund will be paid to the customer at the end of the 5th year.” What you should also note here is that the money in the Discontinued Policy Fund will earn only a return of around 3.5 per cent per annum.

But, if you decide to say goodbye to the policy with charges continuing even after the third year and the fund is also performing badly, then surrender it.

When a ULIP is surrendered, the term cover also terminates. So, before you surrender the policy, take a term cover. For someone in their thirties, a term cover for sum assured of Rs 50 lakh costs around Rs 8,000 a year. To surrender a policy all that you need to do is call the customer care officers of the insurer. There are forms which need to be signed by you and you would also be required to return all the policy documents.

>rajalakshmi.sivam@thehindu.co.in

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