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POSTED BY ON January 4, 2011 10:41 am COMMENTS (13)
Hi all,
I recently started to take interest in my financial health. Have been a regular reader of this site and various others from the past few weeks, and I should say it has been very enlightening.
I have a few queries and need your valuable comments and suggestions.
My Current Situation:
– I am 26 years old and I have been investing 25K per year in a ULIP (ICICI Pru Life Gold). I have completed my 3 year lock-in period this month.
– I usually invest the money as a lump sum in January every year for the tax benefits which I realized is big mistake just recently. Hence u haven’t invested anything till now this year.
– I will get married in 2011 and should be able in invest in funds where I can withdraw when needed.
My Plan:
– I need a Life insurance, for which I will take a Term Insurance policy (mostly an online policy so that I can save some money on agent commission).
– I want to surrender the ULIP which I am holding now.
My Queries:
– Should I surrender the ULIP I have invested 25K per year for 3 years i.e., 75K. Now the value of my units is around 93K. Should I continue investing in this?
– I know that the best way to invest in a mutual fund is through SIP. But I haven’t invested till now. Please suggest any fund/instrument for tax saving.
– Where should I invest so that it can act as an Emergency fund (so that I can take the money when I need it).
– Any other suggestion which suit my situation.
Sorry for the long post. Any comments feedback is highly appreciable.
Thanks,
Sagar
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@Vidyasagar,
First of all stop regretting that you bought a ULIP. See 3 yrs back your whole focus of buying this product was tax saving. The person who sold you might have painted a rosy picture of high returns it might fetch and that could have been the tipping point for you to go for this product and you might think that it has not happened because of heavy charges of the product in the initial years. Still it has delivered you a CAGR of @8.5% post tax( and that too with a promise of 2 lakhs in case of death) It has given a very fair return even after all those charges and moreover very good liquidity when compared to other debt oriented tax saving instruments like NSC/PPF which you might have chosen (and possibly might not have even regretted as you are doing now!) . And even if you had chosen the ELSS as investment at that time(which I strongly doubt) you may not have stuck to same route in the subsequent years once you had noticed the market crash and the associated reduction in the already made investments also. You might have shifted to debt type investments for tax saving(as that was your chief aim) and wouldn’t have been in a situation; a lucky one, which you are at present because you were forced to put in the premiums for the fear of forefeating the money if you don’t make 3 payments. See this ‘systemic discipline’ has worked in your favour. Because in the absense of other two disciplines- 1) your adviser/planner goading/guiding you to stick to the chosen path- the ‘outsourced discipline’ and 2) ‘Self discipline’- which is achieved by the people whose understanding/ability has reached a good level, it was not possible for you.
I don’t subscribe to the view that a ULIP is such a bad choice and to be avoided altogether from your portfolio. It is an extreme view which doesn’t try to understand or highlight the benefits a ULIP has to offer. These are important benefits and it is worth learning how to put them to use. I won’t even subscribe to the other extreme view also that one should put/route all the savings through ULIP and neglect the mutual funds completely. See, the truth always lies in between, never at the extremities of any particular philosophy of money management. Even in today’s scenario of online term plans(which are really cheap), it can be shown that in many situations of different combinations of cover amounts, budgets, and particular companies products that ULIP is better than term+MF combo. But again that also doesn’t mean that one should not have term and MFs in the portfolio. It has to be a judicious combination of all/some avenues.
Now coming back to your particular situation, I want to make some suggestion. I wish you had posed this querry sometime back before your plan anniversary, as you must be in the grace period as of now. One thing I completely agree with Ramesh’s comment appearing above is the analogy of the tree to an investment and to avoid unnecessary uprooting and cutting it down. See this was ICICI’s product till the time they sold you. Now this is ‘your’ asset, they are just paid gardeners who are looking after the tree for you. Supplying it water/nutrient is your job which if you do not then the ample fruits won’t be their to enjoy. So you can prune, shape, support it but don’t cut it.
This product was offering a cover multiplier of @ 100x at age 23 when you bought this. It was also offering a waiver of premium rider; which would help a person to keep on building the corpus even in case of disability as the future premiums are put in by the insurer. this benefit you can never have in a term+MF combo.
Ask the company people whether you can still increase the cover as the anniversary has elapsed but you are yet to pay the premium.(I will complete the write up, have to leave it incomplete)
shashank
@ Shashank
Just wanted to inform you that my plan anniversary hasn’t elapsed and is due on Jan 18 2011. And the grace period after Jan 18th. Also I couldn’t understand the following sentence – “This product was offering a cover multiplier of @ 100x at age 23 when you bought this”. Can you please elaborate on this. Thanks in advance.
-Sagar
Why not switch the “required amount” into the debt option of your ULIP only instead of a FD! Liquidity remains plus relative capital protection. 🙂
why to take a 2% “hit”?
@Ramesh
Thanks Ramesh. I think this is the best option. I will pay my premium for the 4th year too. and change fund to a lower risk option. Right now i am in the multiplier fund. i will choose a complete debt op a mix of debt and equity option. I will get the tax saving & my money is liquid too. Please correct me if my understanding is wrong.
Do not use a hybrid fund option (either equity or debt oriented)! That does not help you in any way.
Out of the 93k corpus, suppose you require 70k in near future. Then put all that + a little more (73k to be on much safer side) into the Protector/Preserver option of the fund NOT in the Balancer/Flexi-balanced.
The rest 20K plus this year’s premium (25k) you can keep in the Multiplier / Flexi Growth fund (check the long term performance of the two funds).
You will have piece of mind as well as “growth potential”. And I totally agree with Shashank’s views.
I hope you do not have any more confusion!
Ramesh
@ Ramesh
Thanks. I will remember the same, and that cleared my confusion too.
@ Shashank
Thanks for such a detailed explanation. Helped me understand the scenario much better. Also waiting for you to complete the write-up 🙂
Now, my plan is to
– continue investing in the ULIP and switch some funds into lesser risk ones as Ramesh suggested.
– buy a online term plan (still need to decide which one) to increase my cover.
– start a SIP in HDFC Tax Saver Growth Fund
-Sagar
@Vidyasagar,
How much life cover you are thinking of buying online and from which insurer?
How much cover you have chosen in the current ULIP you have? I can give you some suggestions regarding the ULIP, if you tell these details.
shashank
@shashank
I have a 2 lakhs life cover in the current ULIP i am holding. I am 26 years old and looking for 30lakhs, 30 year term policy. I was following the blogs and forums and thought of going for an online term policy as they are cheap. I was looking at ICICI iProtect as it was cheaper compared to others.
I am still confused whether to hold the current ULIP or withdraw the money. I might get married this year and will need money at hand. So I cant invest all the money for a 3 year lock-in. As Ramesh pointed out earlier holding the ULIP seems to be a good idea as it is liquid enough to withdraw when needed. But i am afraid the NAV would come down if I wait long (Since i am sure of my short term need). Is it a good idea to withdraw the money and put it in a FD?
@Vidyasagar
There are some mistakes that I feel you are making.
1. First mistake, taking a ULIP and thinking it is a 3- or 5-year tax-saving product only.
2. Second, after those “lock-in” years, when you have paid most of the front-loading charges already and now when the time to take the benefits of a ULIP (whatever benefits!!) has come, you are surrendering the plan. (This is called churning and is wasteful).
Now, your aim should be to maximise the benefits at this junction and not at some hypothetical point (at that hypothetical point, a MF+term is better than a ULIP. :)).
The best plan will be to remain invested in your current plan, because of the following reasons:
1. The basic lock-in is over. Now, your plan is very reasonably liquid. You can withdraw anytime. But as far as I know, you will only get 96% of fund value after 3 years, 98% after 4 years and 100% after 5 years (you have mentioned 98 after 3 years. Just confirm with your own policy document). In case you go for a ELSS, you will have to wait an additional 3 years!
2. Putting top-ups in this plan will give you tax benefits (confirm with policy document about the premium alloc charge. should be 1%).
3. Fund management charge is 0.75-1.5% (very reasonable as compared to a normal MF).
4. Other riders, switches, partial withdrawals can be done with this plan (Not possible with other instruments).
My suggestions:
1. Remain in this plan. Use Topup
2. The other option is an ELSS with 3 year lock-in. You can try to get into an ELSS scheme which has decided to opt for a dividend payout, before the actual dividend date and get some money back!!.
All tax-saving instruments come with a lock-in “penalty”.
Hope this helps.
Ramesh
@ Ramesh
Thanks for the reply.
I completely agree with you that my ULIP is liquid, since it has completed the 3 year lock in period. But I don’t understand what benefits I would get if i don’t surrender the ULIP now? And if I pay my next premium will I be able to withdraw that amount when i surrender the policy?
I checked the policy doc and I get 98% after 3 years, 99% after 4 years and 100% after 5 years.
Benefits are in relation to other options available.
At present, there are 3 options with equity exposure + tax-savings namely ELSS, ULIPs and NPS.
– ELSS has 3-year lock-in for each and every payment, whether in the form of dividend reinvestment or simply purchases or the SIPs.
– NPS has a lock-in till retirement (age 60).
– ULIPs have a 3-year (previously) and now 5-year lock-in (from Sept 1, 2010) starting from the start of policy. Whatever you invest afterwards does not count in terms of time.
Even after paying the next premium or any top-ups, your money/fund will remain liquid without any additional lock-in. Thats the way ULIPs are.
Good that, you get those amounts!! One more thing, your calculations of CAGR should include 2 different calculations. One you have already done in the form of amount invested and fund value at present (8.5%). Other is after deducting the front loading charges and the “actual amount invested” in the fund and the net present value. That will indicate how your fund has actually performed with the money that it has . This is the way it is going to do from now onwards!!
Investments are like trees. If you uproot them every few years, that will hamper the growth. There have been and will always be trees which grow at different rates. This is true for ULIPs and for MFs.
It is better not to enter a ULIP, but if you have already done so and paid all the “big” charges, then at that point, it becomes better. Do not remove them at that point. Continue with them and if you have surplus money, invest judiciously.
Ramesh
Hi Sagar,
I hope you are good enough in mathematics to do simple calculation (compounding math).
Just open the excel sheet and put in simple formulas.
Check your latest ULIP statement and see below :
1) how many units have been accumulated till date.
2) what is your net worth now (Units * NAV).
3) what are the maintenance charges deducted (extorted) till now
4) You will get the returns till now in ULIP (CAGR percentage).
—————————————————————————-
Decision : To be with or not to be with ULIP ?
4) now check what are future charge you have to pay. As after three years charges come down substantially for ULIP plans compared to first couple years.
5) Now you will know how much of your premium will be allocated to get units.
6) Open the same statement (or brochure) and check how much penalty you have to pay if you exit now. Lock in is or three years, but in most of the ULIP plans you have to pay penalty before five years exit (I hate this…come-on it my money…and my decision to exit when needed…Anyways).
7) This way you will come to a conclusion how much amount you will get now, after 5 years, after 7,10,15 years. Excel sheet you help you in this.
8) you will have to make some assumption for future NAV (take it as 8,10 or 12 %) what ever you wish to get.
9) Then check if you exit the ULIP and deposited same amount (+ premium you will pay in future) how much you will get at say 8,10 or 12 %.
10) Share your data with all.
I bet this will be a very good learning experience to you.
FINANCIAL INDEPENDENCE IS MUST !!!
Sachin
Thanks for the quick reply Sachin.
I called up ICICI and found out that i will get 98% of my fund value since i completed 3 years. The fund value now is 96K. i asked for a detailed statement from which i will know how much was actually invested from my premium. I calculated the CAGR% and it was around 8.5%. I almost decided to surrender and take the money out and invest it somewhere else. Where to invest is the question now.
Can you guys please suggest me a liquid fund with tax benifits? Is there any such thing?