Confused senior citizen seeks financial advice on his life insurance 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: You're approaching your policy's maturity date in March 2026, and here are some options to consider for your SBI Life Retire Smart LP policy:

Understanding the Policy:

• Guaranteed Benefit: This policy guarantees 101% of your total paid premium on maturity. In your case, that's Rs 5,05,000 (1.01*Rs 5 lakh).
• Market Performance: The current fund value of Rs 5.70 lakh reflects how the units you invested in have performed in the market.

Decision Points at Maturity (March 2026):

• Surrender the Policy: You can receive the fund value (Rs 5.70 lakh) along with any guaranteed additions or terminal bonuses offered by SBI Life. However, check the policy documents for any surrender charges that might apply.
• Annuitise the Corpus: This option allows you to convert the total corpus (fund value + guaranteed additions) into a regular income stream through an annuity plan from SBI Life. This provides a guaranteed income but limits access to the principal amount.
• Continue the Policy (if allowed): Check with SBI Life if you have the option to extend the policy term. This allows the fund value to potentially grow further through market gains, but you'll continue paying premiums.

Choosing the Right Option:

Since I cannot give financial advice, here's how to make an informed decision:

• Review Policy Documents: Look for details on surrender charges, guaranteed additions, and the option to extend the policy.
• Contact SBI Life: Talk to your SBI Life advisor or customer care to understand the specific benefits and charges associated with each option.

Consider Your Needs:

• Retirement Income Needs: Do you need a guaranteed income stream (Annuity) or are you comfortable with some market risk for potentially higher returns (Continuing the Policy)?
• Other Retirement Savings: Do you have other sources of retirement income, like a pension or investments?
• Medical Needs: Factor in any potential medical expenses that might require a larger corpus.

Additional Tips:

• Market Performance: Consider the current market conditions. If the market is expected to perform well, continuing the policy might be beneficial.
• Risk Tolerance: How comfortable are you with market fluctuations? Annuities offer stability, while continuing the policy exposes you to market risks.

By carefully evaluating these factors and talking with SBI Life, you can make the best decision to secure your financial future in retirement.

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;

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

Ans: Hello;

You have been misguided about features of this policy.

It is unit linked pension plan.

There is 5 year mandatory lock-in.

Please check with your insurer about net fund value as on today.

If you do not have any other pension provision then I suggest you continue with this plan.

But for this to work you have to hold it till maturity/vesting and then opt for pension.

Review the funds selected are in line with your risk profile and requirement.

Best wishes;
X: @mars_invest