Policyholders who are knowledgeable about the financial markets are able to optimize their ULIP fund options and maximize their return on investment. However, if you are a novice investor and your ULIP performs badly, you might be considering cutting off your losses by surrendering your ULIP policy. Most people have that question in their head – Is it good to surrender or to continue with your ULIP till maturity.
So, in this article we will learn about ULIP and understand more about when to surrender it and when to hold on to it.
- What is ULIP Policy?
ULIP i.e. Unit Linked Insurance Plan is a dual purpose, insurance-investment product. It offers investors all the benefits of life insurance as well as investment in multiple fund options under one integrated plan.
- How does it work?
One part of the premium paid provides life insurance cover to the policy holder. The remaining portion is invested in different equity and debt funds. Policyholders can select the type of funds i.e. debt, equity, on the basis of their investment need and risk appetite. Just like mutual funds, the ULIP policy holders are allotted units and every unit has a net asset value (NAV) that is declared daily. NAV is basically the value based on which the net returns that are imposed on ULIPs gets determined. It varies from one ULIP to another on the basis of market conditions and the performance of funds.
- Performance of ULIPs
ULIP is basically an instrument which is market related. If the market is in a good condition, so will be the ULIPs. Even though the market is the primary reason for ULIPs performance, it is also dependent on what charges and fees a ULIP deducts from your investments as well.
Some of the common ULIP charges are
- Premium allocation charge
- Policy administration charge
- Switching charge and
- Surrender charge.
The value of surrender is calculated as Fund Value – Surrender Charges, wherein, the fund value means the Total no. of units under the policy NAV of the fund that is chosen. These charges are however not the same for all ULIPs, some charges are lower. Due to these many charges, the residual investment of any ULIP is not enough for giving considerable return even though the market is doing well.
| When Not to Surrender | When to Surrender |
| There are certain ULIPs that have variable charges that are initially high and then lower. If your ULIP is such and you have invested since a long time, and the date of maturity is near, you must stay invested | Your ULIP has some ongoing regular charges which cuts into your fund value disproportionately. |
| Charges of surrender are too high. If you wait, the surrender charges come down. When the charges of surrender become low or nil, surrender can be done. | There is either low or no surrender charge. |
| ULIP shows better than average performance | If ULIP does not perform well |
| In case your health condition deteriorates after you take this policy, you don’t have to surrender. Getting a new life insurance policy can be difficult and expensive in light of these new ailments. | If it is found that financial instruments give higher return as compared to what your ULIP has given, it is time to cut losses and get out. |
- Whether to Surrender ULIP Policy or Not
If you’ve already invested, it is important to pay a close look at your ULIP and understand the current status of it. On the basis of all the important criteria, it’s your choice whether or not to surrender. Once you surrender, research carefully, and if you’re sure, go invest in the best ULIP plan for yourself.
