Never surrender your Ulip policy within five years

Mumbai: Sandhya Nair was coaxed into buying a Unit Linked Insurance Plan (Ulip) by a life insurance agent. “The product comes with a life insurance cover, high returns and tax benefits, too,” the agent had said. The 10-year plan has an annual premium of Rs 1 lakh and the policy has completed three years. But the policy statement shows that Rs 3 lakh premium paid has a fund value of just Rs 3.02 lakh. Nair now wants to stop paying further premiums and surrender the policy.

According to the persistency data of most life insurers, around 50 per cent of Ulip policyholders surrender their policy within the first five years. While in theory, as ULIPs have a five-year lock-in, terminating the policy early affects returns adversely.

Ulip is considered to be a mutual fund scheme wrapped with an insurance cover. But, unlike a mutual fund scheme where there is one single consolidated total expense ratio (TER) to look at, Ulips have a long list of charges such as the premium allocation charge, mortality charges for the insurance cover, fund management charge, policy administration charge, partial withdrawal char-ges, premium redirection charge and premium discontinuance charge.

This significantly disadvantages policyholders who surrender their Ulip policy within the first five years, as the ULIP charges in this phase ranges between 3 per cent to 9 per cent for the first five years as policy allocation charges are higher and the assets under management (AUM) base is smaller. In contrast, during the same period, mutual fund charges to the customer typically are at around 2 to 3 per cent.

In a study, Jefferies India performed a simulative “cost of ownership” comparison for a (i) 20-year Ulip policy with a seven-year premium payment term and (ii) similar investment in a typical mutual fund product. The study found that it’s only after the first five-six years that the Ulip annual charges (as percentage of fund) come below the mutual fund’s–as the policy administration and allocation costs turn to be very small as percentage of fund and it is mostly around 130 to 135 basis points of fund management fees. However, since initial charges of Ulip are significantly higher, it takes nearly 15 years' holding period before cumulative charges of a Ulip become lower than a mutual fund’s. However, tax savings make Ulip returns superior in six-ten years of holding.