#ULIPs are not as good as mutual funds.
But they have changed drastically over the years.
There are some bad ULIPs. But there are good ones as well.
So, how should you evaluate them?
Moreover, if you have invested in a bad ULIP, how will you exit?
A thread 🧵
But they have changed drastically over the years.
There are some bad ULIPs. But there are good ones as well.
So, how should you evaluate them?
Moreover, if you have invested in a bad ULIP, how will you exit?
A thread 🧵
To evaluate ULIPs, let’s understand a few basics.
#ULIPs can help you save #tax (investments come under Sec 80C).
They combine #investments with life #insurance benefits.
And you can get tax-free returns.
But there are a few things that you should be mindful of.
#ULIPs can help you save #tax (investments come under Sec 80C).
They combine #investments with life #insurance benefits.
And you can get tax-free returns.
But there are a few things that you should be mindful of.
One, if the annual premium is more than Rs 2.5 lakh, returns won’t be tax-free.
Two, be careful about the costs you pay.
ULIP has multiple charges - fund management, mortality, policy administration, etc.
Some are avoidable, some are not.
Let’s understand which is what
Two, be careful about the costs you pay.
ULIP has multiple charges - fund management, mortality, policy administration, etc.
Some are avoidable, some are not.
Let’s understand which is what
An unavoidable fee is ‘Mortality Charges’.
Why? Because #ULIPs include life cover.
And mortality charges go towards maintaining the life #Insurance benefit
Another unavoidable fee is fund management charges.
This is the cost you pay insurers to manage your investments.
Why? Because #ULIPs include life cover.
And mortality charges go towards maintaining the life #Insurance benefit
Another unavoidable fee is fund management charges.
This is the cost you pay insurers to manage your investments.
Many new-age ULIPs (good ones) have only these 2 charges.
They don’t charge premium allocation, policy administration, fund switching, etc, that eat into your returns like the bad ones.
You can check charges in the policy document to distinguish between good and bad ULIPs.
They don’t charge premium allocation, policy administration, fund switching, etc, that eat into your returns like the bad ones.
You can check charges in the policy document to distinguish between good and bad ULIPs.
There are a few other features of #ULIPs as well.
Like mutual funds, ULIPs also offer investments in different asset classes—equity, debt, and hybrid.
But they offer something that #mutualfunds don’t.
Like mutual funds, ULIPs also offer investments in different asset classes—equity, debt, and hybrid.
But they offer something that #mutualfunds don’t.
In ULIPs, You can switch between funds without paying any tax.
This feature (switching) can help you rebalance your investments and minimize losses.
Good ULIPs allow unlimited switches without any charges.
Now, let’s see how to exit a bad ULIP.
This feature (switching) can help you rebalance your investments and minimize losses.
Good ULIPs allow unlimited switches without any charges.
Now, let’s see how to exit a bad ULIP.
To exit a bad ULIP, you need to “surrender” it.
ULIPs have a 5-year lock-in. You can surrender either before it or after it.
Based on when you surrender, your final payout and other benefits are determined.
Let’s check both options in detail.
ULIPs have a 5-year lock-in. You can surrender either before it or after it.
Based on when you surrender, your final payout and other benefits are determined.
Let’s check both options in detail.
𝟭. 𝗦𝘂𝗿𝗿𝗲𝗻𝗱𝗲𝗿 𝗯𝗲𝗳𝗼𝗿𝗲 𝗹𝗼𝗰𝗸-𝗶𝗻
In this case, all your life insurance benefits get canceled.
Your investments move to a ‘Discontinuance Policy (DP) Fund’ until the lock-in period ends.
The insurer may deduct a “discontinuance charge” from your investments.
In this case, all your life insurance benefits get canceled.
Your investments move to a ‘Discontinuance Policy (DP) Fund’ until the lock-in period ends.
The insurer may deduct a “discontinuance charge” from your investments.
Once your corpus goes to a DP fund, you don’t get any investment benefit.
Like a bank savings account, you earn about 4% p.a. on your corpus. (IRDAI declares this rate from time to time).
You get money after the lock-in period ends.
One more thing…
Like a bank savings account, you earn about 4% p.a. on your corpus. (IRDAI declares this rate from time to time).
You get money after the lock-in period ends.
One more thing…
Once you surrender, the only charge applicable is the ‘Fund Management Charge’ on the ‘Discontinuance Policy Fund’.
Currently, this is around 0.5% p.a. for most insurers.
Currently, this is around 0.5% p.a. for most insurers.
𝟮. 𝗦𝘂𝗿𝗿𝗲𝗻𝗱𝗲𝗿 𝗮𝗳𝘁𝗲𝗿 𝘁𝗵𝗲 𝗹𝗼𝗰𝗸-𝗶𝗻
The insurer will close the Unit Account and pay the “surrender value”
This surrender value equals the fund value of the units you have accumulated over the years.
Typically, this takes less than 10 working days to settle
The insurer will close the Unit Account and pay the “surrender value”
This surrender value equals the fund value of the units you have accumulated over the years.
Typically, this takes less than 10 working days to settle
Should you pay premiums for the first five years and then surrender?
Or is it better to stop paying premiums before the lock-in?
The answer depends on how many years you have paid the premium.
Or is it better to stop paying premiums before the lock-in?
The answer depends on how many years you have paid the premium.
If you have paid premiums for just one year, you can consider the surrender option.
But do remember: ULIP charges are the highest in the first 3 years of the policy.
You will only get a fraction of the premiums paid.
There’s one more problem.
But do remember: ULIP charges are the highest in the first 3 years of the policy.
You will only get a fraction of the premiums paid.
There’s one more problem.
If you surrender before 5 years, the money you receive is taxable.
It’s added to your income & taxed as per your slab rate.
Plus, if you had taken tax deductions under Section 80C, it’s nullified.
Practically, you get nothing back.
It’s added to your income & taxed as per your slab rate.
Plus, if you had taken tax deductions under Section 80C, it’s nullified.
Practically, you get nothing back.
Surrendering in the 1st year is still a good option, even though you lose most of your money.
This way, you can save yourself from making bigger losses.
The premiums you were supposed to pay the insurer; put them to good use.
Invest them in a mutual fund & buy a term plan.
This way, you can save yourself from making bigger losses.
The premiums you were supposed to pay the insurer; put them to good use.
Invest them in a mutual fund & buy a term plan.
If you have paid premiums for over 2 years, it may be better to continue at least until the lock-in is over.
Why?
1. You get back part of the premiums paid
2. The money you receive is tax-free
3. Deductions you claimed remain valid
4. You will be eligible for bonuses, if any
Why?
1. You get back part of the premiums paid
2. The money you receive is tax-free
3. Deductions you claimed remain valid
4. You will be eligible for bonuses, if any
What if you have paid premiums for over 5 years?
You’ll need to take a call based on the returns you have made.
For most, it’s an emotional decision rather than a rational one after investing for so long.
Also, the fees and charges are lower after the first 3-5 years.
You’ll need to take a call based on the returns you have made.
For most, it’s an emotional decision rather than a rational one after investing for so long.
Also, the fees and charges are lower after the first 3-5 years.
Hope you found this thread useful.
If you want to know your way out of a traditional life insurance plan, we have explained it in the following thread:
If you want to know your way out of a traditional life insurance plan, we have explained it in the following thread:
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