60-Year-Old With Insurance Coverage: Surrender Traditional Policies?

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

Ans: As I understand from given facts, it is pension plan purchased through employer. Pension from employer is chargeable as Income from Salary at slab rate. Further, TDS can be claimed as refund by filing ITR, if there is no tax liability.

Ans: Traditional insurance policies are those plans which combine insurance coverage with an investment component. They typically include endowment plans, money-back policies, and whole life policies. These plans are designed to provide a maturity benefit along with life coverage. The premiums paid are divided between providing life cover and creating a savings corpus, which grows over time and is paid out either on maturity or death.

However, these traditional policies often come with limitations. The returns from these policies tend to be lower compared to other investment avenues. This is because a significant portion of the premium goes towards providing life cover, administrative costs, and commissions, leaving less for the investment component. Additionally, the lock-in periods can be quite long, reducing flexibility.

Limitations of Traditional Insurance Policies
One major drawback of traditional insurance policies is their limited returns. These policies typically yield around 4-6% per annum, which might not even beat inflation in the long run. This can result in a reduction in purchasing power of the maturity benefit.

Another concern is the lack of transparency. The exact break-up of the premium and the growth of the investment component are often not disclosed clearly. Policyholders are often unaware of how much of their premium is being invested and how it is performing.

Moreover, these policies tend to have high surrender charges if you decide to exit the policy before maturity. This can lead to significant losses if you decide to discontinue the policy early.

Evaluating Your Insurance Needs
If you have already taken a term plan with a higher sum assured, such as Rs. 2 crore, it is essential to reassess your insurance needs. A term plan is a pure protection plan that provides a high sum assured at a relatively low premium. It does not have an investment component, making it a cost-effective way to secure your family's financial future.

In contrast, traditional insurance policies mix investment and insurance, often resulting in suboptimal returns and inadequate coverage. With a robust term plan in place, the primary need for financial protection is already addressed. This allows you to focus on more efficient investment strategies for wealth creation.

The Case for Surrendering Traditional Policies
Given the limitations of traditional insurance policies, it might be prudent to consider surrendering these policies and redirecting the funds into more efficient investment avenues. However, this decision should not be taken lightly and must be based on a thorough evaluation of your financial goals, current portfolio, and the performance of your existing policies.

Benefits of Actively Managed Mutual Funds
Actively managed mutual funds offer several advantages over traditional insurance policies and index funds. These funds are managed by professional fund managers who actively select stocks and securities with the potential to outperform the market.

One of the key benefits of actively managed funds is the potential for higher returns. By carefully selecting investments based on extensive research and market analysis, fund managers can take advantage of market opportunities and mitigate risks. This can result in better performance compared to passively managed funds or traditional insurance policies.

Additionally, actively managed funds provide a high level of diversification. By investing in a mix of assets, these funds can spread risk across different sectors and geographies, reducing the impact of any single underperforming investment.

Moreover, actively managed funds offer flexibility. Investors can choose from a wide range of funds based on their risk tolerance, investment horizon, and financial goals. This allows for a more tailored investment strategy compared to the rigid structure of traditional insurance policies.

Disadvantages of Index Funds
While index funds are often praised for their low costs and simplicity, they come with their own set of disadvantages. Index funds aim to replicate the performance of a specific market index, such as the Nifty 50 or the Sensex. This means they invest in all the stocks that make up the index, in the same proportion.

One major drawback of index funds is their inability to outperform the market. Since these funds are designed to mirror the index, they can only perform as well as the index itself. During market downturns, index funds can suffer significant losses, as they do not have the flexibility to adjust their holdings.

Another concern is the lack of active management. Index funds do not benefit from the expertise of a fund manager who can make strategic decisions based on market conditions. This can limit the potential for higher returns and risk management.

Disadvantages of Direct Funds
Investing in direct mutual funds might seem appealing due to the absence of distributor commissions, but it has its pitfalls. One significant drawback is the lack of guidance. Without a Certified Financial Planner (CFP) to help navigate the complex investment landscape, investors might make uninformed decisions.

Direct funds also require a higher level of financial literacy and market understanding. Many investors may not have the time or expertise to effectively manage their portfolios. This can lead to suboptimal asset allocation and increased risk.

Furthermore, regular plans through Mutual Fund Distributors (MFDs) with CFP credentials offer ongoing advice and portfolio review. This continuous support can help in adjusting the investment strategy based on market conditions and changing financial goals.

Reinvesting Surrendered Policy Funds
If you decide to surrender your traditional insurance policies, it is crucial to reinvest the proceeds wisely. Here are some investment options that can offer better returns and align with your financial goals:

Actively Managed Equity Mutual Funds: These funds invest in a diversified portfolio of stocks, offering the potential for high returns. They are managed by experienced fund managers who aim to outperform the market.

Debt Mutual Funds: For those with a lower risk tolerance, debt mutual funds can be a good option. These funds invest in fixed-income securities like government bonds, corporate bonds, and money market instruments, providing stable returns with lower risk.

Systematic Investment Plans (SIPs): SIPs allow you to invest a fixed amount regularly in mutual funds. This disciplined approach can help in averaging out the cost of investments and reducing the impact of market volatility.

Balanced or Hybrid Funds: These funds invest in a mix of equity and debt instruments, providing a balance between risk and return. They can be a suitable option for investors looking for moderate risk and steady returns.

The Importance of Diversification
Diversification is a key principle in investment. By spreading investments across different asset classes, sectors, and geographies, you can reduce risk and improve the potential for returns. A well-diversified portfolio can help in mitigating the impact of any single underperforming investment.

Regular Portfolio Review
Regularly reviewing your investment portfolio is crucial. This helps in ensuring that your investments are aligned with your financial goals and risk tolerance. It also allows you to make necessary adjustments based on market conditions and changing life circumstances.

Understanding Your Financial Journey
Understanding your financial journey is crucial. Everyone has unique financial goals, risk tolerance, and investment horizons. It's essential to have a strategy tailored to your specific needs. Reassessing your portfolio periodically and making informed decisions is key to achieving financial success.

Your Financial Planning Efforts
Taking a term plan with a high sum assured shows your commitment to securing your family's financial future. It's a wise decision that demonstrates foresight and responsibility. Now, enhancing your investment strategy can further strengthen your financial position.

Final Insights
In summary, while traditional insurance policies provide a blend of insurance and investment, their limitations often outweigh the benefits. With a robust term plan in place, it makes sense to reassess and potentially surrender these policies. Redirecting the funds into more efficient investment avenues like actively managed mutual funds can offer higher returns and better align with your financial goals. It's essential to diversify your investments, regularly review your portfolio, and seek professional guidance to navigate the complexities of the investment landscape.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: Financial Overview
Current Status

You are single and retired.

No family or loan commitments.

Insurance Policies

Health insurance: Rs. 10 lakhs with Royal Sundaram.

Life insurance term plan: Rs. 50 lakhs.

Traditional insurance plans from LIC: Rs. 25 lakhs.

Annual insurance premium: Rs. 50,000.

Appreciating Your Efforts
You have a well-structured plan.

Health and life insurance cover your needs.

Insurance Review
Health Insurance

Your health insurance cover is Rs. 10 lakhs.

Consider increasing it to Rs. 20 lakhs.

This ensures better protection against rising medical costs.

Life Insurance

Your life cover is Rs. 50 lakhs.

Since you have no family commitments, this is sufficient.

Traditional Insurance Plans
Jeevan Tarang and Jeevan Amrut

These plans provide survival benefits.

Use these benefits to pay your annual premium.

Surrender Option

Consider surrendering these policies if needed.

The surrender value can be reinvested in mutual funds.

Investment Strategy
Mutual Funds

Actively managed funds can offer higher returns.

Consider SIPs in large-cap and balanced funds.

PPF and NPS

Continue with PPF and NPS investments.

They offer safety and tax benefits.

Disadvantages of Index Funds
Lower Returns

Index funds mimic the market.

They often yield lower returns compared to actively managed funds.

Lack of Flexibility

Index funds have less flexibility.

Actively managed funds adapt to market conditions.

Disadvantages of Direct Funds
Lack of Guidance

Direct funds lack professional advice.

Regular funds provide support through MFDs with CFP credentials.

Higher Risk

Direct funds can be riskier.

Professional guidance helps mitigate risks.

Emergency Fund
Maintain Liquidity

Keep an emergency fund.

Ensure it's equivalent to 6-12 months of expenses.

Liquid Mutual Funds

Consider liquid mutual funds for this purpose.

They offer better returns than savings accounts.

Action Plan
Increase Health Cover

Increase your health insurance to Rs. 20 lakhs.

Review Traditional Policies

Consider surrendering LIC policies.

Reinvest the proceeds in mutual funds.

Continue SIPs

Increase SIP contributions.

Focus on large-cap and balanced funds.

Maintain Emergency Fund

Keep a sufficient emergency fund.

Use liquid mutual funds for better returns.

Final Insights
Your current insurance and investment strategy is commendable.

Consider increasing your health cover for better protection.

Reevaluate traditional policies and focus on mutual funds.

Maintain an emergency fund for financial stability.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in

Ans: You have a well-structured insurance portfolio with Rs. 1 crore coverage. This includes term and traditional plans. The plan you mentioned provides a 5.5% annual survival benefit, life cover until age 100, and a maturity benefit. The idea of using these policies as a form of pension by receiving 5.5% of the sum assured monthly is thoughtful.

Given your current situation—no dependents and no need to create a legacy—your focus shifts from protection to optimizing returns. With the premium payment term over, you face no further financial commitments. Your plan is now a source of regular income, and at the end of the term, you will receive a bonus amounting to 80% of the premiums paid.

Evaluating the Need to Continue or Surrender the Policies
Benefits of Continuing with the Policy
Regular Income: The 5.5% survival benefit provides a steady income stream. This is particularly useful if you require a predictable cash flow.

Life Cover Until Age 100: While you may not need life cover, this ensures a safety net is in place. Should anything happen, your nominee receives a substantial amount.

Maturity Benefit: The policy promises the sum assured plus accumulated bonuses at age 100. This is a significant amount that adds to your financial security in your later years.

No Further Commitments: With the premium payment term over, you don’t need to invest any more money into this policy. You are just reaping the benefits now.

Drawbacks of Continuing with the Policy
Low Returns: The 5.5% return is modest, akin to the returns from fixed deposits or debt funds. Over time, inflation might erode the purchasing power of this income.

Opportunity Cost: If you surrender the policy, you could potentially invest the surrender value in higher-yielding investments. This could provide better returns over time.

Limited Flexibility: Insurance policies like this one are rigid. You can't easily adjust your investment based on changing market conditions.

Should You Surrender the Policy?
Factors Favoring Surrender
Unlocking Higher Returns: By surrendering the policy, you can reinvest the surrender value in more lucrative options. Actively managed mutual funds, for instance, offer potential for higher returns.

No Need for Life Cover: With no dependents, the life cover aspect may not be essential. The focus should be on maximizing your financial returns rather than providing a death benefit.

Maximizing Financial Freedom: Reinvesting the surrender value gives you more control over your finances. You can tailor your investments to suit your risk tolerance and financial goals.

Factors Against Surrender
Guaranteed Income: If you value the certainty of the 5.5% survival benefit, continuing the policy is advantageous. This is especially true if you prefer a low-risk, predictable income stream.

Bonus Payout: At the end of the term, you receive a bonus equivalent to 80% of the premiums paid. Surrendering the policy means forfeiting this benefit.

Emotional Comfort: Sometimes, the comfort of having a guaranteed income, regardless of the returns, can outweigh the potential for higher returns elsewhere.

Exploring Alternative Investment Options
Actively Managed Mutual Funds
Higher Returns Potential: Actively managed funds often outperform passive options like index funds. Experienced fund managers can navigate market fluctuations to maximize returns.

Professional Guidance: Investing through a Certified Financial Planner ensures that your investments are aligned with your goals. This helps in optimizing returns while managing risk.

Reinvestment Flexibility: You have the flexibility to reinvest dividends or capital gains, allowing for compounding growth.

Avoiding Direct Funds
Lack of Professional Management: Direct funds require a hands-on approach. Without professional guidance, you might miss out on potential gains or take on unnecessary risks.

Complexity: Direct funds demand more time and knowledge. Unless you’re an expert, this can lead to suboptimal decisions.

Benefits of Regular Funds: By investing through a Certified Financial Planner, you gain access to regular funds. These offer the expertise of a fund manager who can help you navigate market conditions and maximize returns.

Insurance Strategy: Term Plan vs. Traditional Plans
Advantages of Term Plans
Cost-Effective: Term plans provide high coverage at a low cost. This frees up more funds for other investments.

Focus on Wealth Building: With no dependents, you can focus on wealth accumulation rather than protection. The money saved from term insurance premiums can be invested in high-return avenues.

Disadvantages of Traditional Plans
Low Returns: Traditional plans often provide lower returns compared to other investment options. They are primarily designed for protection, not wealth creation.

Lack of Flexibility: Traditional plans are rigid. Once you’re locked in, it’s difficult to adapt to changing financial needs or market conditions.

Should You Retain Your Term Plan?
Minimal Cost: If your term plan premium is low, retaining it might be a good idea. It provides peace of mind at a negligible cost.

Focus on Other Investments: With your primary protection in place, you can focus on building your wealth through other investment options.

Final Insights
In your situation, maximizing your financial returns is key. The traditional policy provides a steady income but may not offer the best returns long-term. Surrendering the policy and reinvesting in actively managed mutual funds could yield better results. This strategy allows you to tailor your investments to your financial goals and risk tolerance.

With no dependents, your primary focus should be on wealth accumulation and enjoying your financial independence. A Certified Financial Planner can guide you through this process, ensuring that your investments are optimized for growth while managing risk.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner,

www.holisticinvestment.in