I paid two annual premiums of Rs 30,000 in Met Smart Platinum after buying the policy in September 2010. Three more years are to go for the completion of the 5-year lock in with Ulips. The current value of my investment is Rs 51,000, which is far less compared to the sum I have paid as premium. I recently switched to a low-risk fund, which earned 12 per cent. If I stop paying future premiums, the policy will discontinue. To get returns from this policy, I need to wait till 2015. Should I stop the Ulip premiums and start investing in ELSS instead, or continue with the low-risk fund option in the Ulip? -Imran Pathan
Ulips are combination products that mix life insurance and investments. They also provide tax benefits in the form for deduction under Section 80C on the premiums paid. You are one amongst many who bought Ulips for these triple benefits without realising the risks and limitations of such a product. It is for this reason that we stress on the need to keep investments and insurance separate.
The Met Smart Platinum deducts 6 per cent from the annual premium as premium allocation charges, besides mortality charges, fund management fee and policy administration fee. All these add up to about 8-10 per cent of the premium paid, which means of the Rs 30,000 you pay, only about Rs 27,000 goes into investing. The fund value will depend on the performance of the fund, which has resulted in the fund value to be Rs 51,000 after paying premiums for two years. Your move to a low-risk fund option that has paid 12 per cent in the past year will take some time before it reflects in the fund value your investments attain.
Compared to Ulips, ELSS are far more tax efficient. This instrument comes with the lowest lock-in period of three years amongst the products that qualify for tax deductions under Section 80C. They also have high equity exposure, which has the potential to provide good returns over a three-year period. Having paid premiums for two years, you may continue paying premiums for three more years rather than write-off the paid premiums if you can. You can also continue claiming the tax benefits that Ulips provide. The lesson for you is to separate life insurance from investments and benefit from taking a pure risk term insurance plan to meet your life insurance needs and invest in tax planning funds to benefit from the power of equity.