Personal Finance

To hold or surrender

Suresh Parthasarathy | Updated on March 19, 2011 Published on March 19, 2011

IW20_INSURANCE   -  The Hindu

I have invested in LIC Profit Plus in March 2008 with a monthly premium of Rs 1,000. Even though the policy is for five years, one can stop premium payments from the third year. I found that the premium allocation charge is 16 per cent for first year....

I have invested in LIC Profit Plus in March 2008 with a monthly premium of Rs 1,000. Even though the policy is for five years, one can stop premium payments from the third year. I found that the premium allocation charge is 16 per cent for first year and 4 per cent thereafter in this plan. My policy term is for 20 years.

In the last three years I have paid Rs 35,000 as premium and the accumulated value is Rs 34,269. Is the performance of the scheme acceptable? Is it advisable to continue the subscription?

R. Ganesan

The performance of the scheme is not impressive. Some mutual fund schemes with similar style of investing 80 per cent of their assets in equity have given 25 per cent return if you have invested through SIPs (the present value is Rs 53,700). But ULIPs being a long term product, it may be best to assess returns after a 5-year period. However, even taking into account a premium allocation charge of 24 per cent in the first year, Profit Plus' performance is not appealing.

As there is no surrender charge after three years, you can stop paying premia once you have paid for three years.

Before surrendering the policy, it is advisable to take term insurance.

I have two ULIPs with sums assured of Rs 4 lakh and Rs 9 lakh. My first policy HDFC ULIP Endowment, I took in August 2006 (policy term is 15 years) and carries a quarterly premium of Rs 2,500.

Till date I have paid Rs 47,500 as premium and my current value is Rs 48,000.

In September 2009 I bought HDFC Young Star Plus II (policy term 25 years) with a monthly premium of Rs 2,000. The current value is Rs 39,000 whereas I have paid Rs 62,000.

My queries are: How are these ULIPs performing? Do I have to continue with the same fund option or do I need to switch? Will these policies be eligible for tax rebate ince the new tax code is in effect? How long do I need to continue to get a 15 per cent return considering my initial charges?

Elairaja M.

On the performance front, both these plans have seen their net asset value better their benchmark over the past few years. Despite the performance, however, the current value of your holdings is down mainly on account of the high first year premium allocation charge levied by the plan. In particular the charge for Young Star Plus II is high at 60 per cent of the first year premium. In both cases, it is better to continue with them as you have already suffered the charges. From now on, most of your premium after deducting the mortality charges will go towards investments. This will perk up the returns. So it is better to continue with the same fund option rather than making a switch. However, it may be advisable to use switches closer to the maturity to protect your corpus.

Regarding thedirect tax code, based on the current proposals, premium paid to ULIPs will not eligible for tax deduction. In India equity as an asset class comfortably delivered 15 per cent return over longer time frame.

I am 26 years old with a monthly income of Rs 20,000. I wish to know, for my future pension needs is it better to save through insurance or mutual funds?

Dilip Kumar

If your investment goals are for 10 years or more, it may help to an equity component in them to beat inflation and earn better returns. You can acquire this equity through mutual funds. The major difference between buying pension product through insurance and mutual fund is that, with new IRDA regulation if you save through insurance you will be getting a guaranteed return of 4.5 per cent and at maturity you are allowed to withdraw one-third of the accumulation. For the rest, you have to buy anannuity. If you invest through mutual funds, especially open ended ones, you can withdraw your entire investment at any time.

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Published on March 19, 2011

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