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ULIPs: Stay or get out?


PC asks:

I would like your opinion on the investment that i made this year. One of my colleagues suggested me to put in my money in ulip’s. I foolishly put in 25k’s each in sbi life unit plus 2 regular and icici life plus. Now after doing a bit of research on the net, i realised what a big mistake i made. Should i continue with my yearly premiums and wait out the mandatory 3 years? Should i change the asset allocation ( it is 100% equity in both)? Or should i call it quits and try and forget the 50k loss that I will be making in the process?

PC, the answer is going to be a little tricky. You have invested Rs. 50,000 (50K) in two ULIPs. Both these have zero surrender value upto three years. So you can:

1) Continue to pay the fixed premium (Rs. 25K each) on these policies, for the next three years and then withdraw.

2) “Ditch” the premium already paid, and invest the same amount in an ELSS mutual fund from the next year onwards.

I ran a quick calculation on both and put the values into an online spreadsheet for you to analyse.

You have already put in Rs. 50,000, and usually mutual funds gain at least 2% more than ULIPs, so I’ll use 10% gain on ULIPs and 12% on the mutual fund. I’ve considered exact values that SBI and ICICI prulife charge as commissions and monthly charges. I’ve NOT considered mortality charges because you’ll need insurance cover either ways and you’ll fund that with a term plan (I guess) if you choose 2).

You’ll notice that continuing the insurance premium is of little use in either SBI Life or PruICICI’s cases. You’re better off only after the 3rd year, and before the 7th year; and that is because the premium you’ve already paid is lost. After the 7th year, the mutual fund earns better returns.

But if you’re not looking long term (i.e. 7 years or more), then you can pay two more premiums. Exit after that – your total loss will only be around Rs. 10,000 (which is less than the Rs. 25,000 you will lose otherwise).


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