1) I had taken an SBI Life Insurance Policy Retire Smart - LP policy for 10 Lakhs with @1 Lakh premium paid every year. 2) Policy was taken in March 2019, and it was given understanding that I can close the policy after 5 years - without penalty. 3) I had paid 5 Lakhs as premium in this policy and the present fund value is about 5.70 Lakhs. 4) Kindly advice about decision to be taken for this policy after completing 5 years, ie after 7 months. My Age is 74 Years.

Ans: The SBI Life Retire Smart is a Unit Linked Insurance Plan (ULIP) marketed as a pension plan. It invests your premium in equities and debt-oriented funds managed by SBI Life, aiming to provide retirement benefits in the form of an annuity. This review will help you determine if the SBI Life Retire Smart Plan is a good investment for your retirement.

Key Features of SBI Life Retire Smart Plan

This ULIP is designed as a retirement plan and differs from conventional ULIPs. Key features include predefined investment strategies and maturity benefits. For example, if you start this plan at 35 with a 25-year term, paying Rs 1,00,000 annually, your premium will be invested in three different funds under the "Advantage Plan" strategy.

Fund Options and Allocation Strategy

The Retire Smart Plan offers a predefined asset allocation strategy, named the "Advantage Plan." This strategy invests more in high-risk, high-return equity funds in the early years and reallocates to safer funds as the policy matures. This approach aims to balance growth potential with stability over time.

Death Benefits

The death benefit is the highest of the fund value plus terminal addition or 105% of the total premiums paid. Terminal addition is 1.5% of the fund value on the date of death. The nominee can receive the death benefit as a lump sum or use it to purchase an annuity. However, the death benefit does not include a sum assured, making the risk cover minimal.

Maturity Benefits

The maturity benefit is the highest of the fund value plus terminal addition or 101% of the total premiums paid. While the policy guarantees 101% of the premiums paid, the actual return is subject to market performance. The guaranteed maturity benefit may not be sufficient given the potential for higher returns in long-term equity investments.

Analysis of Returns

Guaranteed Returns: If the policy generates an annual return of 4%, the effective annual rate of return (IRR) is approximately 3.62%. After deducting charges, the actual return is even lower.
Higher Returns Scenario: If the policy generates an annual return of 8%, the IRR is around 7.4%. After charges, the actual return is less than 7.4%. Given the 25-year investment horizon, this return is not attractive considering the equity risk.
Comparison with Alternatives

PPF vs. SBI Life Retire Smart

PPF Investment: Investing Rs 1,00,000 annually in PPF for 25 years could provide substantial returns. Assuming the current PPF interest rate of 7.1%, the corpus at the end of 25 years would be approximately Rs 68.7 lakhs.
Tax Benefits: PPF offers tax benefits under section 80C and has the EEE (Exempt-Exempt-Exempt) status. The returns are risk-free and backed by the government.
ELSS vs. SBI Life Retire Smart

ELSS Investment: Investing in ELSS funds could yield an annual return of around 12%. Over 25 years, Rs 1,00,000 invested annually could grow to approximately Rs 1.33 crores, after accounting for 10% long-term capital gains (LTCG) tax.
Flexibility: ELSS investments offer greater flexibility and the potential for higher returns compared to ULIPs. Additionally, ELSS investments provide tax benefits under section 80C.
Surrender and Reinvest Strategy

Considering the low returns and high charges of the SBI Life Retire Smart Plan, it is advisable to surrender the policy after the 5-year lock-in period. You can then reinvest the proceeds into mutual funds.

Reinvestment in Mutual Funds: By investing in diversified mutual funds, you can achieve better returns. Equity mutual funds, in particular, offer significant growth potential over the long term.
Systematic Withdrawal Plan (SWP): During retirement, you can opt for an SWP from your mutual fund investments. SWPs provide regular income by allowing you to withdraw a fixed amount periodically, ensuring a steady cash flow.
Pros and Cons of SBI Life Retire Smart

Pros:

Offers both insurance and investment benefits.
Provides a predefined investment strategy for risk management.
Cons:

High charges for premium allocation and policy administration.
Limited flexibility in fund selection.
Minimal risk cover and guaranteed returns.
Verdict

The SBI Life Retire Smart Plan may not be the best choice for retirement planning. The guaranteed returns are low compared to potential returns from PPF and ELSS. For conservative investors, PPF plus a term insurance plan is a better option. For those with higher risk tolerance, ELSS plus a term insurance plan offers greater growth potential.

Overview

You have an SBI Life Insurance Policy Retire Smart - LP with a sum assured of Rs 10 lakhs, paying an annual premium of Rs 1 lakh since March 2019. With five premiums paid, the current fund value is Rs 5.70 lakhs. You have the option to close the policy after 5 years without penalty. Considering your age of 74 years, the decision should focus on maximizing your retirement funds.

Assessment of Current Situation

Premiums Paid: Rs 5 lakhs
Current Fund Value: Rs 5.70 lakhs
Policy Tenure Completed: Almost 5 years
Your fund has grown modestly, providing a return slightly above the total premiums paid. Given your age and the need for a stable income, it's crucial to evaluate options that ensure financial security and better returns.

Decision After 5 Years

1. Surrender the Policy

After completing 5 years, you can surrender the policy without incurring any penalty. This would be a strategic move considering the limited growth observed in your fund value.

Benefits of Surrendering the Policy:

Avoid Future Charges: ULIPs like this have various charges, including premium allocation, policy administration, and fund management fees, which can eat into returns.
Better Investment Opportunities: You can reinvest the proceeds in more lucrative and less costly investment options.
2. Reinvest in Mutual Funds

After surrendering the policy, consider reinvesting the proceeds into diversified mutual funds. Mutual funds typically offer better returns compared to ULIPs due to lower costs and more focused investment strategies.

Recommended Investment Strategy:

Diversified Equity Funds: Suitable for potentially higher returns, balancing risk with growth opportunities.

Balanced Funds or Hybrid Funds: These funds invest in a mix of equities and debt, offering a balance between growth and stability.

Debt Funds: For conservative investments, providing stable returns with lower risk.

3. Systematic Withdrawal Plan (SWP) for Regular Income

Once reinvested in mutual funds, you can set up a Systematic Withdrawal Plan (SWP) to ensure a regular income. This is particularly beneficial for retirees, offering a steady cash flow while keeping the remaining funds invested for potential growth.

Advantages of SWP:

Regular Income: Fixed amount at regular intervals (monthly, quarterly).
Tax Efficiency: Only the capital gains portion of the withdrawal is taxed.
Flexibility: You can adjust the withdrawal amount based on your needs.
Steps to Implement the Plan:

Surrender the Policy: Contact SBI Life to process the surrender after completing the 5-year term. Ensure you understand the procedure and any documentation required.

Evaluate Mutual Fund Options: With a Certified Financial Planner, choose a mix of mutual funds suited to your risk tolerance and income needs.

Set Up SWP: Once the funds are invested, set up an SWP to provide a regular income.

Conclusion

Considering the limited growth in your current ULIP and your age, surrendering the SBI Life Retire Smart Plan after 5 years is a prudent decision. Reinvesting the proceeds into mutual funds and opting for an SWP can provide better returns and a steady income stream, ensuring financial stability in your retirement years. Always consult a Certified Financial Planner to tailor the strategy to your specific financial situation and goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in