I have been investing in LICI Money plus for 1 year. Premium is 90000 /year.Policy term is 5 years.?

Question

But now I understand that 5 years is a very short term for ULIP policies. Shall I discontinue & wait for whatever I get after 3 policy years , or continue ? Can I extend the term of policy ?

Answer 1

Palash,

I might sound like a broken record! But investing in ULIPs is not a good idea -whether it is from LIC or Birla Sunlife or anyone else! ULIP is the highest selling financial product in the country. But unfortunately it is also the most mis-sold product. No agent will ever tell you that the upfront costs are as much as 30% in the intial years. So out of say Rs.10,000 that you invest, Rs.3000 would go towards agent comission, fund management charges, admin charges, etc. etc. That implies only Rs. 7000 is getting invested in the market! If you understand the compounding effect of money (if not read this article Power of Compounding at

http://www.valueresearchonline.com/story...

you will realise how big a financial cost is thus hidden from you.

Next whatever insurance life cover you are getting can be had at approx. 1/10th the cost thru a separate Term Plan cover. Read why Insurance and Investment should not be mixed here at

Investments? Insurance? Or both?

http://www.personalfn.com/detail.asp?dat...

Insurance vs Mutual Funds

http://www.valueresearchonline.com/story...

Now that you are more educated on how there are far better financial instruments to multiply your money (and separate Term Plan covers to take care of Insurance needs), you know that ULIP is not what you want to go with, certainly not for next 15 years. By extending a 5 year term you will only be compounding the folly, because the 30% charges are not restricted to the first 5 years, but atleast for the 7-8 years, and the charges become comparable to MFs only by the lat 2-3 yeasr of a 15 year term.

What is the best way to understand the implications. Simply ask for a chart from the agent of how much is invested each year of the 15 year term. When you compare that with teh Rs.90,000 that you pay every year, you will be shocked into your senses! Then you have to do the next bit, put into a spreadsheet how Rs. 90000 compounds at a rate of 15% for 15 years and compare what the ULIP actual-invested amounts compound! The impact of that will just throw you! I can guarantee. If you need any help with these calculations, send me a note from your mail ID and I will send you a spreadsheet fro the same. Armed with that, confront your LIC Agent and see how he runs away from you!

So, Congratulations! You have taken the right but tough but right long-term decision. It is evident that surrendering a ULIP Policy after having paid the premiums for the first 3 years may be considered by many an unwise option, as you stand to lose some money. But then, continuing with high premiums only at the behest of your agent is even more unwise and over the long-term this could hurt your finances a lot more.

There is a surrender value applicable, if you have paid premiums regularly for atleast 3 years. So you will not lose all your money or premiums paid. There are interesting options offered by LIC too. Read on more...the following excerpt from an article at personalfn.com

The trouble begins when you decide to discontinue the policy like many ULIP & Insurance investors have done in the recent past, after realising that the policy doesn’t quite fit into their scheme of things.

In such a scenario, the policy is considered to have lapsed and all the premiums paid are forfeited. More importantly, the insurer doesn’t entertain any claims once the policy lapses. However, it should be understood that the policy is not necessarily forfeited i.e. the policy’s value doesn’t become nil. The Insurance Act does not allow for forfeiture as every policy acquires a reserve based on the premiums already paid.

The Insurance Act provides for a return to the policy holder of an amount that is representative of the reserve and this is referred to as the ‘Surrender Value’ or the ‘Cash Value’. The Insurance Act stipulates that every insurance policy shall have a guaranteed Surrender Value, if at least 3 years’ premiums have been paid. This reserve arises due to the following:

1. Premiums in the early years of the policy being more than what is justified.

2. Savings element in the premium.

Apart from the option of surrendering your policy, insurers like LIC also provide other options like making a policy ‘paid-up’, whereby the policy remains in force with a reduced sum assured, depending upon the number of premiums paid. Another option is to keep the policy in force by deducting future premiums, from the Surrender Value. A third option is to provide term insurance subject to the condition that the Surrender Value is more than the sum assured.

Surrender Value is usually calculated as a percentage of the portfolio returns. Portfolio returns are calculated assuming a nominal something like 15% annual growth of the invested amounts (Premiums minus expenses, which as you now know are quite high in the initial years)

Read the complete article at

http://www.personalfn.com/detail.asp?dat...

Hope this has enough information for you to take a considered decision. And if convinced, please spread the knowledge about ULIP product and how it is mis-sold in this country. Cheers!