Planning exit from ULIPs

My wife and I have purchased Birla Sun Life’s Insurance Policies- Classic Life, Platinum Premier and Freedom 58. Lock-in period is five years in the Classic Life Plan and three years Platinum Premier policy. Pay terms are five years in some and ten years in others. There is a lack of transparency in returns from these policies and I am not sure if I have selected the right ones. I have completed three policy years and paid the premium regularly. I want to discontinue paying their premium. Will it be the right decision?
-Suresh K

All mentioned policies are Unit Linked policies, which are insurance cum investment plans. These plans do not provide good insurance cover as higher cover becomes expensive. They are not good investment tools with returns lower than other investments, because of high expenses charged in early years. ULIP charges are relatively higher than other policies. ULIPs allow one to exit but with heavy losses. Your policies can be classified as new or old ULIPs. ULIPs issued after September 2010 are new ones, while those issued before this date are the old ones.

Birla Sun Life Classic Life is a new ULIP with a lock-in period of 5 years. Surrendering this policy now will cost you more and the charges will reduce if you delay surrender.

Charges would be limited to Rs 2,000 or less if you surrender in the fourth policy year and reduce to zero from 5th year and onwards. Surrendering now will cost you 3 per cent of the annual premium, or 3 per cent of the fund value or Rs 4,000; whichever is lower.

If you surrender now, insurance company will transfer your funds less Discontinuance charges into Discontinued Policy Fund. You will get your money only after completion of five policy years. The Discontinued Policy Fund will earn an annual interest at 3.5 per cent on compounding basis. You may stop paying premiums and surrender your policy.

Birla Sun Life Freedom 58 is an old ULIP with a lock-in of 3 years. Surrendering now will cost you 50 per cent of the annual premium. Surrender value will be paid only at the end of third policy year. The charges will reduce to 45 and 40 per cent if you surrender in fourth and fifth years respectively. There will be no surrender charges if you surrender thereafter.

Birla Sun Life Platinum Premier is a ULIP that guarantees highest daily NAV over seven years along with life insurance. A point to note in such plans is that they guarantee highest NAV of the fund which may or may not be in tandem with equity markets. It purely depends on performance of the fund during those years. It may also happen that fund managers become conservative and keep large portion of funds in debt instruments to lock the NAV achieved so far. In such a case if equity markets rise further, the investor will have to compromise with lower NAV.

If you surrender now, the surrender charges will be 40 per cent of annual policy premium. Charges will reduce to 20 per cent and 10 per cent if surrendered before completion of fourth and fifth year respectively. Surrender charges will be nil if you surrender thereafter.

Birla Sun Life Freedom 58 and BSL Platinum Premier are old ULIPs which had higher surrender charges as compared to new ULIPs. You are stuck with these policies as you have already borne major portion of expenses under the policy. If you wish to exit these policies now, you will have to incur losses. However, exiting now would prevent losses further.

Before surrendering, make sure you get an adequate Term Life insurance to protect your family against financial turmoil in your absence. The cover should be large enough to incur your family’s daily expenses till your retirement years or till someone else in the family starts earning.

This article was originally published on May 24, 2013.