Published in Mint on, Oct 08 2013, Written by Kapil Mehta
I started investing in a life insurance-cum-investment plan amounting to Rs.50,000 per annum as premium and it had a lock-in period of three years. Till date, I have paid 4 instalments (total amount paid till date is Rs.2 lakh for four years) but its worth as per the present net asset value (NAV) is around Rs.2.01 lakh only. I am really troubled and confused whether I should redeem the units or stay invested without paying any more premium as the investment horizon is of 10 years with minimum lock-in period of three years. Policy highlight is that you have to pay at least 3 instalments but you can remain in the scheme till 10 years and sell the unit at prevailing NAV at the end of 10 years and the scheme invests 90% in equity and balance in cash/debt market.
Unfortunately the plan you bought is a high cost unit-linked insurance plan (Ulip). These have now been phased out. There is a rational as well as an emotional response to your predicament. First, the rational view: Pull together three bits of information—current surrender charge, the year when surrender charges get to zero and future annual charges.
If future annual charges work out to less than 2% of the fund value per annum, then you are probably better off continuing it until maturity. Alternate investments you make may not be significantly cheaper or have the tax advantages of this policy.
If the charges are over 2%, then you should close the plan and invest elsewhere. The important question, however, is when? If surrender charges are zero, exit immediately otherwise stop paying premiums and exit as soon as policy surrender charges become minimal.
Now for the emotional response: I would not want to continue with a product that has destroyed so much value and would exit the policy when surrender costs are zero, even if the annual charges or returns are comparable to other investment opportunities.
I took a Ulip plan in September 2006 for which the lock-in period is 10 years. Till now, I have paid Rs.2.39 lakh and the fund value is Rs.2.32 lakh after 7 years. Surrender value is Rs.1.98 lakh. The company charges around 18% as charges in various forms. Should I surrender the plan and buy a term plan?
You have already lost considerable value in this Ulip and will lose an additional Rs.34,000, or about 15%, of the fund value if you surrender your policy now. Do not throw good money after bad. I suggest that you stop paying future premiums and let the policy deduct charges from the existing fund. Surrender the policy in the year the surrender charges reduce to zero or a minimal value.
You must definitely buy a term plan. This is the most cost-effective way of purchasing life insurance and securing your family’s financial future.