Dump old Ulips if charges, returns are not similar to mutual fund's

Ulips issued after September 1, 2010, are far more consumer-friendly than the older ones in terms of the overall charge structure and the limits up to which charges can be front-loaded. While the debate on whether it is a good idea to combine your insurance and investment needs continues, not much has been written on whether consumers who bought Ulips prior to September 1, 2010, should continue with the policies or stop paying premium on them or even surrender them.

Conventional wisdom is that if you have had the Ulip for three or more years, then you have already incurred the high upfront charges that were prevalent with the older Ulips. Therefore, it makes sense to continue with the plan since the charges in future will be reasonable.

Of course, the base assumption is that the returns on the funds will be equivalent to a comparable mutual fund, but the overall charge structure going forward will be lower than that of a mutual fund. Hence, as an investment option, it will make a lot of sense. This conventional wisdom, however, can be challenged on the following grounds:

Firstly, in case of Ulips issued prior to September 1, 2010, (when Insurance Regulatory and Development Authority, or Irda, first brought in the restrictions on the overall charges), there are quite a few Ulips whose continue are stiff even 4-5 years after the policy being issued. Now, that is not true in all the cases, but you should check your policy documents for details about the charges. A dead giveaway is if the fund management charges are in excess of 2% (for equity fund options) and the plan continues to have policy allocation charges and policy administration charges. This makes it relatively unattractive as an investment option, more so since the mutual fund industry has been required to drop fund management charges to around 1.75% to 2 % due to Securities and Exchange Board of India, or Sebi, regulations. Thus, the assumption that in future the charges on old Ulips will be lower than a comparable mutual fund may not necessarily hold true in the case of old Ulips.

Secondly, even the base assumption that the Ulip fund will earn a return comparable to an equivalent mutual fund may not be true in all the cases. So, you should check the returns for a three-year or a five-year period for the Ulip fund and compare it with how the benchmark index has returned over the same period as well as some of the top performing mutual funds in that category. Now, while a number of websites are available to check the returns of a specific mutual fund scheme (sites such valueresearchonline, moneycontrol and mutualfundsindia, etc) only a few websites, such as moneycontrol.com, provide details about the returns of Ulip schemes. Now, point-to-point 3- or 5-year return is not exactly the best way to check the relative performance of any fund scheme (whether Ulip or mutual fund), but if such return for any Ulip plan is starkly lower than its benchmark or the top-performing comparable mutual fund scheme, then clearly it cannot be a great long-term investment option.

Lastly for type II Ulips (where death benefit is the fund value plus the sum insured, and therefore mortality charges are payable for the entire duration of the policy) and type I Ulips (where death benefit is the higher of the sum insured or fund value) that have a large component of insurance (meaning that despite the build-up of funds over the last few years, there would still be mortality charges being deducted on account of the sum insured), the mortality charges would be quite high since these would have been fixed quite a few years ago and completely ignore the substantial drop in mortality charges in the past few years. In fact, quite a few Ulips ignore this drop in mortality charges for new plans also since mortality charges are not covered by the Irda guidelines.

In short, it may not pay to follow conventional wisdom as far as your old Ulips are concerned. Check the current charges to be sure that they are in line with a comparable mutual fund. Check their returns over the last three or five years in relation to the benchmark as well as a comparable mutual fund and also check on the mortality charges should it still be a relevant factor for your policy. If the policy is unfavorable on any parameter, it might be a good idea for you to surrender the policy after it acquires a surrender value at a reasonable surrender cost. Of course, make sure you have adequate term insurance before you surrender any insurance plan. If this sounds like too much work for you to do, just consult a financial planning professional firm to review all your existing insurance policies for you. The fee you pay for such advice will more than pay for itself in terms of the enhanced investment returns and appropriate insurance coverage.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/compare/dump-old-ulips-if-charges-returns-are-not-similar-to-mutual-funds/articleshow/10060510.cms?curpg=2