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Should I surrender my ULIP Policy?

Query: I am a 30-year old person working in an IT company. Five years back I was sold a ULIP policy for a 15-year term. I had opted for an equity-based portfolio and the fund value of the same is still less than the premiums I have paid till date. I want to surrender this policy. Should I do so?

Answer: Since ULIPs are very different products as compared to the traditional endowment or moneyback type of plans, the approach herein is quite different.

In terms of investment, ULIPs are quite similar to MFs. Hence, our approach would be to compare ULIPs with MFs and decide on the future course of action. Broadly, there are three parameters to be considered – Performance, Entry Charges and Annual Costs. The basic idea is to check whether it is better to continue paying premiums or instead start investing in MFs.

1. Upfront deductions: Most ULIPs have high up-front deductions for at least 3-5 years (known as premium allocation charges). Thereafter, some ULIPs have such upfront deductions and some don't. Whereas MFs don't have any upfront charges. Therefore,
a) If the ULIPs continue to have high upfront charge, it would make sense to stop paying any further premiums. Going forward, this amount could well be invested in MFs.
b) If like MF, your ULIP does not have any upfront charges henceforth, you could continue making premium payments PROVIDED the fund's performance is above par vis-a-vis the benchmark and the peers.

2. Annual fund management charges: Most ULIPs have lower fund management charges than MFs. Therefore, it would make sense not to withdraw the amount already invested. Depending on the policy terms, you could continue with the policy based on the premiums already paid. [And point 1 would determine whether you continue with the premium payments also or not.]

Generally is it seen that having paid the high charges initially, closing a ULIP may not be a good idea. One could stop paying premiums after 3-5 mandatory years, but keep the policy alive for 8-10 years and recover whatever is possible thru’ lower annual fund management charges — this, of course, as mentioned earlier only if the fund is an outperformer.

Note: This discussion pertains to the ULIPs bought before Sept 2010. Also, as the terms and conditions vary a lot across ULIPs this blog is only a broad strategy... that you can use to analyze your particular ULIP. 

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