Reader Query: Should I exit this ULIP?

Reader S writes in:

Hey Deepak,
I am invested in 2 ULIPS.
1) Birla Sun Life SaralWealth : 35800 anually since Feb 2010 ( paid 1 premiums) current fund value is 25629.
2) Birla sun life Dream Plan: 12000 anually since Jan 2009 ( paid 2 premiums) current value is 20762
I also have a term policy of Birla sunlife premium of 7k annually and cover of 50 lakhs.
I was totally shocked to see 11000 deducted as loading charges on SaralWealth.
Please advice what would be the right time to get out of the policies and which policy should I retain.

Birla Saral Wealth Plan

You seem to have the 20 year, 20 pay plan.  From the brochure, this plan has

  • 30% charges of the first three years premium. Nothing after that. But they’ve already stolen enough.
  • 0.25% per month as admin charges – ridiculous again, that’s a 3% charge over the year, which for you is Rs. 1000 per year more.
  • Surrender charges of 1 premium (for you) less than three years, 1/2 a premium in the fourth year, and 1/4th a premium in the fifth.
  • No surrender charge after five years

Given that they have already stolen 33% of your money (30% commission, plus 3% admin charges) and you have only 25K left in the fund, let’s see what you can do. You have two choices:

  • surrender by letting the policy lapse
  • and Invest in the future in a simple mutual fund (the insurance they offer is 2 lakhs cover. That will cost Rs. 800 per year, so let’s take that out and put only 35,000 into the MF)

You can do the above two options this year, or put in one more premium of 35,800 this year and take this decision next year, and so on. Let’s assume both options give you 10% returns, and let’s look at where you will be in five years.

Assumptions:

  1. 33% load for next two years, 3% subsequently.
  2. Invest 35K in mutual fund, but 35,800 in ULIP.
  3. ULIP Mortality charges assumed to be Rs. 700 per year.

Check out the spreadsheet – you can copy it and modify formulas if you like. Tell me if there’s something wrong.

As you might notice, the best options for your money is either to get out now (1.78 lakhs after five years) or stay for five years (1.83 lakhs). Getting out now might be marginally better if you think a mutual fund can do a better job in terms of performance. You’ll get nothing, but mark it to experience – you will end up paying about the same amount as commissions if you stay with the policy. On the other hand, if you want to hold on, pay the next four years premiums – getting out anywhere else in the middle is financially a negative.

Anything else is not worth it. There may be an issue with tax – I have heard it said that if you exit an insurance policy within five years, you have to pay back the 80C exemption (if used) in past years.

Birla Dream Plan

I’ve written about this plan before, and I think it is only useful as a plain term plan, not as an investment at all. Now you will need to do your calculations as I’ve done it above for the saral plan to figure out if it’s better to exit now or wait.

It’s easier to say “don’t buy a ULIP” than to say “exit now”. All exits need to be measured, for opportunity costs and other such details.