Should I Invest in an Annuity?

Ans: It's understandable to reassess your financial commitments, especially as you near retirement age. Your decision to review your SBI Life policy is a wise one.

Considering scheme performance and charges, surrendering the policy and reinvesting in mutual funds could align better with your goals. Mutual funds offer flexibility, diverse investment options, and potentially higher returns.

Reflecting on this transition, it's essential to appreciate the lessons learned from your previous investment choices. Life is a journey of growth and learning, and adjusting our financial plans is a natural part of that process.

Consulting with a Certified Financial Planner can provide valuable guidance tailored to your specific needs and aspirations. Remember, it's never too late to realign your financial strategy to better suit your circumstances and goals.

Ans: At the age of 64, it is important to carefully assess the effectiveness of your financial strategies. You have been investing Rs. 2,00,000 annually into the SBI Life Retired Smart Policy since 2019. Now that your last premium has been paid in September 2024, the key question is whether you should continue with this policy or shift to other investment options like mutual funds. Let’s evaluate this from various perspectives to guide you in making an informed decision.

Understanding Your Policy Structure
This policy is a ULIP (Unit-Linked Insurance Plan), which offers life cover as well as investment benefits. However, ULIPs often have a high-cost structure, including premium allocation charges, fund management fees, and mortality charges, especially in the early years of the policy. This affects the overall returns.

Now that you have completed five years of premium payments, you might have overcome the high initial costs. Let’s break down the key factors:

Premium Paid: You have paid Rs. 2,00,000 annually for 5 years, which amounts to Rs. 10,00,000 in total.

Policy Period: It is a 10-year policy, and you are halfway through. You still have 5 years remaining.

Returns: ULIP returns are linked to the performance of the funds you are invested in, which could be either equity, debt, or balanced. These returns vary, and ULIPs typically do not outperform mutual funds due to higher costs.

Let’s now weigh the pros and cons of continuing with your policy.

Benefits of Continuing the SBI Life Retired Smart Policy
There are a few advantages to staying with the current policy, especially since you have already paid 5 years of premiums.

Life Insurance Coverage: The policy provides life cover, which can be a key benefit if you do not have adequate life insurance coverage. However, at the age of 64, the need for life insurance generally reduces unless you have dependents.

Completion of Lock-in Period: You have completed the lock-in period, so you can exit without penalties if needed. You also avoid the heavy initial charges that were already deducted in the early years.

Tax Benefits: The premiums paid provide tax benefits under Section 80C, and the maturity proceeds could be tax-free under Section 10(10D), subject to conditions. However, these tax benefits alone may not justify continuing the policy if the returns are subpar.

Disadvantages of Continuing the SBI Life Retired Smart Policy
On the flip side, there are several reasons why continuing with the policy might not be the best decision for you.

High Charges: ULIPs come with several charges, such as fund management fees, mortality charges, and policy administration fees. These charges reduce the overall return on your investment. Mutual funds, in comparison, tend to have lower fees, especially if you invest through a certified financial planner.

Limited Flexibility: In a ULIP, you are limited to the funds offered by the insurance company. These funds may not have the same performance or diversity as mutual funds managed by top fund houses. Actively managed mutual funds have a proven track record of generating superior returns over the long term due to the expertise of professional fund managers.

Mediocre Returns: Most ULIPs deliver lower returns than mutual funds, primarily due to their cost structure. You might have experienced average growth in your policy, which could affect your retirement planning.

Lack of Liquidity: ULIPs typically do not offer liquidity until the end of the policy term, whereas mutual funds provide better flexibility, allowing you to redeem funds when needed.

Exploring Mutual Fund Investments
Switching to mutual funds could be a better strategy at this stage, given that you’ve completed 5 years in the ULIP. Here are the advantages of transitioning to mutual funds:

Higher Returns Potential: Actively managed mutual funds have consistently outperformed ULIPs due to their lower cost structure and professional fund management. You can invest in funds that suit your risk profile, whether equity, hybrid, or debt funds.

Better Flexibility: Mutual funds offer the flexibility to switch between different types of funds based on your financial goals. This flexibility is lacking in ULIPs, which have a rigid structure.

Low Costs: Mutual funds, especially through a certified financial planner, have much lower expense ratios than ULIPs. This ensures that a larger portion of your investment goes toward earning returns rather than paying fees.

Tax Efficiency: With the new tax rules for mutual funds, long-term capital gains (LTCG) on equity mutual funds above Rs. 1.25 lakh are taxed at 12.5%, while short-term capital gains (STCG) are taxed at 20%. Debt mutual funds are taxed according to your income tax slab. Despite these tax implications, mutual funds may still offer better post-tax returns compared to ULIPs.

Disadvantages of Index Funds and Direct Funds
While you might be tempted to explore index funds or direct mutual fund investments, they have certain limitations.

Index Funds: These funds replicate market indices like Nifty or Sensex. However, they do not offer the potential to outperform the market. Actively managed funds, on the other hand, have the ability to generate higher returns by capitalising on market opportunities. Given that your policy period has another 5 years, you may benefit more from actively managed funds than passive index funds.

Direct Funds: While direct funds have lower expense ratios than regular funds, they may not be ideal for everyone. Without professional advice, it can be challenging to choose the right funds and manage your portfolio effectively. Investing through a certified financial planner ensures that you receive expert advice, helping you achieve better long-term results.

Should You Surrender the Policy?
Given the analysis above, surrendering the SBI Life Retired Smart Policy and reinvesting in mutual funds could offer you better returns, lower costs, and more flexibility. However, it is important to consider the following before making a decision:

Surrender Charges: Check if there are any surrender charges applicable to your policy. If these charges are high, you may want to wait until the policy matures to avoid any penalties.

Tax Implications: While the premiums paid are eligible for tax deductions, the maturity proceeds might also be tax-exempt. However, surrendering the policy could lead to tax implications, so it’s important to consult with a certified financial planner to understand the tax impact.

Alternative Investment: If you decide to exit the policy, mutual funds offer a diverse range of options tailored to your financial goals and risk tolerance.

Final Insights
In summary, your decision to continue or exit the SBI Life Retired Smart Policy depends on your financial goals, risk tolerance, and investment strategy.

The policy has provided life insurance coverage and tax benefits, but its returns may be limited due to high charges.

By switching to mutual funds, you can potentially achieve higher returns, lower costs, and better flexibility for your remaining investment horizon.

Avoid index funds and direct funds in favour of actively managed mutual funds through a certified financial planner to get the best results for your retirement planning.

Best Regards,

K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

Ans: Hello;

When did you start 25 K monthly sip and also type of mutual fund?
Also how much is your investment in cumulative FD, also inform about rate of interest and FD tenure.

This will enable us to provide a more precise answer.

Monthly sip (25 K)if continued from today for 8 years will yield you a sum of 40.38 L which may yield a monthly income of 20 K.

You will need corpus of around 3 Cr to be able to provide monthly income of around 1 L (post-tax)

Happy Investing;

Ans: Hello;

I do not know your allocation to the ulip funds but it is giving you an XIRR of around 9.5% which is good(tax free).

Also the maturity proceeds of your ulip investment won't invoke any LTCG tax.

You may review the choice of funds in ulip plan with your insurance advisor.

I recommend you to continue with this investment alongwith other investments.

Best wishes;
X: @mars_invest