Dear Mr Ramalingam,
Good Afternoon. I am 55years old. I had purchased two SBI life policies(Plan Name: SBIL- Smart Privilege Series III- RP and LP) one for self and one for my wife with annually paid premiums of ?1200000/- and ?600000/- respectively in Feb 2023 for Policy Term of 10 years. I have two questions:
1. Is paying annual premium financially beneficial as compared to paying half yearly or quarterly?
2. Should I continue paying the premium after the first compulsory premiums of 5 years or invest the amount in Equity Mutual funds for better appreciation of money?
Thank you, Warm Regards.
Ans: Investing Rs. 12,00,000 annually for yourself and Rs. 6,00,000 for your wife in SBI Life Smart Privilege plans requires a thorough evaluation. Your queries about premium payment frequency and policy continuation beyond five years are critical for maximising returns and aligning with your financial goals.
Let’s analyse these aspects comprehensively.
1. Premium Payment Frequency: Annual vs Half-Yearly or Quarterly
Cost Efficiency of Annual Premiums
Annual premiums often cost less than half-yearly or quarterly options. Insurers offer discounts for lump-sum annual payments.
Paying in smaller instalments results in additional administrative charges. This increases the total cost of the policy.
Annual payments ensure immediate allocation of your funds. Half-yearly or quarterly payments delay this allocation, reducing the compounding benefit.
Opting for annual payments is financially efficient, provided cash flow permits it.
Impact on Cash Flow
Annual payments require larger cash reserves. Evaluate whether this impacts your liquidity needs.
If cash flow is constrained, half-yearly or quarterly options provide flexibility. However, they incur higher costs.
2. Continuation After 5 Years vs Investing in Equity Mutual Funds
Performance of ULIPs vs Equity Mutual Funds
SBI Life Smart Privilege is a ULIP (Unit-Linked Insurance Plan). ULIPs combine insurance with investments.
ULIPs have higher charges such as policy administration, premium allocation, and fund management fees. These charges reduce net returns.
Equity Mutual Funds often outperform ULIPs due to lower expense ratios. They focus solely on wealth creation, unlike ULIPs.
Lock-In Period Considerations
ULIPs have a mandatory 5-year lock-in. Beyond this period, the decision to continue depends on fund performance and your financial goals.
Evaluate your ULIP’s fund performance against comparable equity mutual funds. If it underperforms, consider discontinuing premium payments.
Flexibility and Liquidity
Mutual funds offer better liquidity and flexibility. You can withdraw or switch funds based on market conditions.
ULIPs restrict fund switches to options within the policy. Mutual funds provide a wider range of choices.
Advantages of Shifting to Equity Mutual Funds
Higher Returns: Actively managed equity funds generally deliver higher long-term returns than ULIPs.
Lower Charges: Mutual funds have lower expense ratios, maximising your investment growth.
Tax Efficiency: Equity mutual funds have tax benefits, but gains above Rs. 1.25 lakh are taxed at 12.5%. ULIPs have tax-free withdrawals under certain conditions, but the overall returns may still lag.
Goal Alignment: Mutual funds are better suited for long-term wealth creation and goal-specific planning.
Why Not Index Funds?
Index funds lack active management. They simply replicate market indices without adapting to market conditions.
Actively managed funds, on the other hand, strive to outperform the market. They offer better returns when managed by experienced professionals.
Index funds cannot shield against downside risks during market corrections. Actively managed funds provide better resilience in volatile markets.
Evaluating Policy Continuation After 5 Years
Key Questions to Assess
Is the ULIP’s fund performance aligned with your expectations?
Are the charges within the ULIP justified by the returns it offers?
Would reallocating the premium to mutual funds provide better results for your goals?
Strategic Approach
If ULIP performance is consistently below par, you can stop further premiums after five years.
Shift future premiums to mutual funds. Choose funds based on your risk tolerance and financial goals.
Retain the accumulated corpus in the ULIP until maturity to avoid surrender penalties.
Steps to Optimise Your Investments
Review Fund Performance: Regularly assess the returns generated by your ULIP. Compare them with benchmark indices and mutual funds.
Consult a Certified Financial Planner: A CFP can guide you in selecting suitable mutual funds for reallocation.
Diversify Investments: Spread your investments across equity, balanced, and debt funds for optimal risk management.
Leverage Tax Benefits: Plan withdrawals strategically to minimise tax liabilities under the new mutual fund taxation rules.
Taxation Insights
ULIPs offer tax-free maturity proceeds under Section 10(10D) if annual premiums do not exceed Rs. 2,50,000.
Mutual funds are subject to the following tax rules:
Equity mutual funds: Gains above Rs. 1.25 lakh are taxed at 12.5%.
Short-term gains on equity funds are taxed at 20%.
Debt mutual funds are taxed as per your income tax slab.
Consider these rules when deciding between ULIPs and mutual funds.
Key Takeaways
Annual premium payments are cost-effective if cash flow permits.
Continuing ULIPs beyond five years depends on their performance and alignment with your goals.
Equity mutual funds are a better option for wealth creation due to higher returns and lower charges.
Diversify investments and consult a Certified Financial Planner for personalised advice.
Final Insights
Your decision to invest in ULIPs was a thoughtful one, considering their insurance benefits. However, for long-term wealth creation, mutual funds could offer better appreciation. Evaluating the performance of your ULIPs after five years is crucial. If they underperform, consider reallocating your premiums to equity mutual funds for enhanced returns.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment
