Should you ditch ULIP for an equity fund + a term plan?

Here's what you can do if you want to exit your unit-linked insurance plan

Should you ditch ULIP for an equity fund + a term plan?

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You might be familiar with a work colleague who lacks talent but is successful. If so, say hello to ULIPs, or unit-linked insurance plans (ULIPs). They are cut from the same cloth.

Though marketed as a 2-in-1 investment wonder because ULIPs combine investing with insurance, they fall short on both counts. They are neither a great insurance plan nor a good investment option. Perhaps, this is why one of our readers wants to re-align her finances. While she did buy a ULIP six years back, she wants to know if she should exit the policy and look for better alternatives.

Fortunately, she does have better options.

Let's give you an inside look.

Her current status

She invested in SBI Smart Privilege ULIP six years back.

The particulars of the policy are as below:

SBI Smart Privilege ULIP

Policy term 20 years
Plan type Regular
Annual premium Rs 6 lakh
Investment split (assumed) Equity fund (100 per cent)
Premium allocation charges 2.5 per cent for five years
Fund management charges 1.35 per cent

Upon contributing Rs 6 lakh annually to the ULIP plan, the policyholder will receive a total amount of over Rs 50 lakh (adjusted for charges such as premium allocation and fund management fees) after surrendering the policy at the end of six years, assuming a return of 12 per cent.

From here, the policyholder can do the below:

Invest in a term insurance plan and an equity fund (like an index fund)

Upon surrendering the ULIP after six years, the policyholder is left with over Rs 50 lakh obtained from the policy.

At this juncture, it is advisable to consider procuring a term plan , such as iPRU iProtect Smart, which offers coverage of Rs 50 lakh until the age of 50, with a monthly premium of Rs 628 (inclusive of 18 per cent GST).

The amount from the ULIP plus the annual Rs 6 lakh (that they otherwise were paying as ULIP premium) can then be invested in an index fund over the subsequent 14 years.

For the sake of calculation

To be on a safer side, invest Rs 50 lakh from the ULIP for 3 years (36 months) and the annual Rs 6 lakh premium (Rs 50,000 per month, minus Rs 628 for the term plan premium) over the next 14 years (168 months). For the first 36 months, the monthly SIP is nearly Rs 1.9 lakh. Then, invest Rs 49,372 monthly for the remaining months. Assuming a 12 per cent annual return from the index fund, the total corpus after 14 years would be over Rs 4.33 crore.

Had the investor continued with the ULIP plan, the accumulated amount (net of charges) at the end of 20 years would be around Rs 3.98 crore (assuming 12 per cent return). This is the main reason why we don't recommend opting for a ULIP policy as charges may seem as a small percentage in the short-term, but they will eat up your returns by a significant amount in the long run.

The policyholder can also invest solely in an equity fund (like an index fund).

However, this is only advisable if the investor already has an insurance plan.
The policyholder can invest solely in an index fund (without buying a term plan) with a monthly SIP of Rs 50,000 over 20 years. In such a case, the final corpus (after factoring in charges of 0.2 per cent) would amount to around Rs 4.86 crore (assumed return of 12 per cent).

A cautionary note for investors

Certain investment instruments are often presented as golden opportunities, and ULIPs fall into this category. However, the true picture emerges once the actual returns materialise. While ULIPs have a longstanding presence, their major drawback remains the substantial charges that ultimately erode long-term returns.

Also read: Say no to endowment policies and ULIPs

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