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ULIP Policy - Surrender or Continue

Note: This discussion pertains to older version of 'expensive' equity-based ULIPs (newer version of ULIPs have a reasonable cost structure)

ULIP Policies and Mutual Funds are similar products as far as the investment pattern is concerned...both invest in the same equity market.

So the decision to surrender or continue with your ULIP policy will depend on mainly one aspect...COST.



Case 1: You have already paid 3 years' premiums 
You have 3 options - (i) continue as it is, (ii) stop the policy totally or (iii) stop further premiums but continue with the policy [based on the premiums already paid].

a) The first cost is the entry cost. There in no entry load in MFs. However, there may be premium allocation charges (in simple terms entry cost) in ULIPs. So logically, it makes sense not to make any further investment in ULIP and instead invest the same amount in a MF, if you have to pay entry load each time you pay your insurance premiums.

b) The second cost is the annual fund management and other charges. If ULIPs have a lower annual cost vis-a-vis MFs, it would make sense to let the money, already invested till date, in the ULIP plan to continue till the policy permits...no point in shifting the corpus to more expensive MF.


By the way: Since ULIPs are not as standardised as MFs, it will not be possible to make a universal suggestion. However, in most cases option (iii) is likely to be the most appropriate option — you must, however, check this for your specific plan.

Don't forget to check the surrender charges, in case you plan to go for option (ii) i.e. complete closure. 

Case 2: You are yet to complete 3 years
If you have paid only 1 or 2 years' premiums, you will lose the entire premium(s) paid. Surrender Value is ZERO if the policy is closed within 3 years. Therefore (unless the cost structure is very steep - as discussed in case 1), it would be advisable to continue your ULIP policy for at least 3 years and take a view thereafter.



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