Choose Equity Funds over ULIPs | Value Research Surrender your Kotak Smart Advantage ULIP now and limit your limits. Find out where to invest instead

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Choose Equity Funds over ULIPs

Surrender your Kotak Smart Advantage ULIP now and limit your limits. Find out where to invest instead

I am a 29 year old salaried professional with a working wife (combined monthly income around ₹1.4 lakh). I have a Kotak Smart Advantage ULIP policy (and the mutual fund Kotak Opportunities Fund). I have been paying ₹3000 every month since January 2009. Both of us do not have any dependents presently. I have the following question: Is it a good idea to continue with this policy or surrender it? My wife and I do not have any other life insurance apart from company provided ones.
The fund value is ₹1.8 lakh. According to the policy, first year premium does not go in this fund. It is invested elsewhere to give a 170% return after 20 years.

- Nikhil Malhotra

Kotak Smart Advantage is a unit linked policy that offers two types of assured benefits - The Fixed Advantage Benefit and The Dynamic Advantage. The Fixed Advantage Benefit is an assured value guaranteed at end of premium payment term. It is calculated at a pre-stated percentage of first year's premium depending on premium payment term chosen. The Dynamic Advantage on the other hand is an assured bonus credited to fund value at end of 10th, 15th, 20th, 25th and 30th policy year.

There is no free lunch. These guaranteed returns cost you your first year premium which means nothing is invested during first policy year. Another catch is that if you wish to earn the Fixed Advantage Benefit, you have to continue the policy till end of the term. If in case of any emergency you need funds and thus wish to stop the policy and withdraw, you will not receive Fixed Advantage Benefit.

From policy year 2 you have to pay Fund Management Charge which is 2 percent per annum (on basis of fund opted), an administration charge which is ₹65 per month and this charge increases at 5 percent every year. Apart from these, mortality charge for the insurance component has to be paid too. Surrender charges are nil if you complete at least 8 years with the policy. Otherwise, you will be charged (8-N) percentage of fund value, where; N is the year of surrender. If you surrender now, you will receive fund value less surrender charges. Surrender charge in your case will be 3 percent of the fund value.

You have paid around ₹1,98,000 as premiums but fund value is ₹180,000 indicating that you have a loss after deducting expenses. Upon surrender, you will be charged a further 3% of ₹180,000. You have completed 5 years with the policy. Do not wait for the policy to reach breakeven. It is better to limit your losses here itself. Surrender this plan and start investing systematically into mutual funds. We would suggest funds such as HDFC Top 200, ICICI Pru Top 100 and Quantum Long Term Equity for the portfolio.

As mentioned, you have employer-provided life insurance. Check the policy term and sum assured. The policy term should be long enough to cover you till someone else in the family starts earning and take care of financial responsibilities. An adequate sum assured would be sum of all your expenses and liabilities over time less your savings and investments. Calculate this and if you find that employer provided life insurance isn't enough, buy a pure term insurance policy to fill the gap.

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