I have 20 lakhs in my account and a house in my name. At present I am not earning. I have taken SBI Life smart wealth builder with installment of 1Lakh, for 12 years and premium payment term of 7 years. Applicable tax rate is 18%. I have paid the premium for 2 years so far. I also invested in MF and taken a health insurance. I am thinking if it would be wise to continue with the SBI life. If I close SBI life and invest that in MF will it be beneficial for me? I have taken a break from my career due to health issues, and planning to continue with my job soon with an expected income of 40-50k. I am 50 years old. I need to take care of my son's (18 years) higher studies and plan for my retirement.
Ans: You have Rs. 20 lakhs in your bank account and own a house. At present, you are not earning, but you plan to restart your career soon with an expected income of Rs. 40,000–50,000 monthly.
Your key financial priorities include:
Funding your son’s higher education (he is 18 years old).
Planning for your retirement at age 50.
You hold an SBI Life Smart Wealth Builder policy with a yearly premium of Rs. 1 lakh. You have paid for 2 years, with a premium payment term of 7 years and a policy term of 12 years.
You also have mutual funds and health insurance in place. This is commendable as it shows thoughtful financial planning.
Let us evaluate whether to continue with the SBI Life policy or switch to mutual funds.
Understanding SBI Life Smart Wealth Builder
SBI Life Smart Wealth Builder is a unit-linked insurance plan (ULIP).
It combines insurance and investment but tends to underperform compared to standalone investments.
ULIPs have higher charges like mortality fees, premium allocation, and administration charges.
These charges eat into your returns, especially in the initial years.
Tax deductions under Section 80C are available, but only premiums within 10% of the sum assured qualify.
Disadvantages of Continuing SBI Life
The fund returns in ULIPs are generally lower than mutual funds.
High charges reduce your corpus growth potential.
You already have health insurance, which is essential.
Buying a standalone term insurance plan separately is more cost-effective than ULIPs.
Benefits of Switching to Mutual Funds
Mutual funds offer flexibility with no lock-in beyond ELSS funds (3 years).
They provide higher returns than ULIPs over long-term horizons like 10–15 years.
Actively managed funds allow diversification across equity, debt, and hybrid categories.
You can adjust your portfolio based on changing goals, such as education or retirement.
Tax Implications of Surrendering SBI Life
ULIP surrender after 5 years is tax-free.
If surrendered within 5 years, the tax benefits claimed earlier may need to be reversed.
The amount withdrawn could be added to your taxable income.
Consult a Certified Financial Planner to manage these tax implications effectively.
Steps to Execute the Switch
Step 1: Surrender the SBI Life Policy
Stop paying further premiums for the SBI Life Smart Wealth Builder policy.
Surrender the policy after understanding any exit penalties and charges.
Step 2: Allocate the Surrendered Amount to Mutual Funds
Diversify the amount into equity mutual funds, debt mutual funds, and hybrid funds.
Choose funds based on your risk appetite and financial goals.
Step 3: Use SIPs for Regular Contributions
Start systematic investment plans (SIPs) for your monthly contributions.
Begin SIPs of Rs. 1 lakh yearly or Rs. 8,000 monthly after surrendering the ULIP.
Investment Plan for Rs. 20 Lakhs
Higher Education Goal
Allocate Rs. 10–12 lakhs to a mix of equity and hybrid mutual funds.
Ensure a significant portion is invested in funds with low to moderate risk.
Use the Systematic Transfer Plan (STP) to move funds to safer options closer to need.
Retirement Planning
Allocate Rs. 8–10 lakhs for long-term growth in diversified equity funds.
Choose funds that align with your risk tolerance and provide inflation-beating returns.
Review your retirement corpus periodically to ensure it meets future needs.
Importance of Diversification
Balance equity and debt to mitigate risks.
Use equity funds for long-term wealth creation.
Use debt funds or fixed-income instruments for stability.
Consider a hybrid fund for a balanced approach between equity and debt.
Tax Considerations for Mutual Funds
Equity mutual funds: Long-term capital gains (LTCG) above Rs. 1.25 lakhs taxed at 12.5%.
Short-term capital gains (STCG) taxed at 20%.
Debt mutual funds: Gains taxed as per your income tax slab.
Plan withdrawals efficiently to reduce tax outgo.
Key Points for Financial Stability
Build an emergency fund with 6 months of expenses before investing further.
Continue your health insurance policy for financial protection against medical emergencies.
Restart SIPs once your job stabilises to ensure disciplined investing.
Final Insights
Switching from SBI Life Smart Wealth Builder to mutual funds can optimise your financial goals. This strategy offers higher returns, better flexibility, and lower costs. It aligns well with your priorities for your son’s education and your retirement. Evaluate your decisions annually and consult a Certified Financial Planner for personalised advice.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment