In this article, I will explain how you can easily decide whether to discontinue or hold your HDFC Crest ULIP (Unit-linked insurance plan).
There are certain points about HDFC Crest ULIP that are important to know. These have been covered in an excellent article by Deepak Shenoy at Capital Mind. He has explained why the high charges don’t leave too much on the table for the investor. A better option will be to invest in a mutual fund and a term plan separately. Separate your investment and insurance respectively instead of combining it in a ULIP.
What if you have already invested in HDFC Crest ULIP?
I was asked this question by a reader who is around 32 years old. He pays Rs. 50,000/- as premium every year. He gets Rs. 5,00,000/- as death benefit. He started investing 2 years back in the highest NAV guarantee plan. Now his third year premium is due and he is in a fix. He does not know whether to discontinue or continue investing till the fifthyear.
I am sure there are many people in this boat who don’t know what to do with a product with high charges.
What are the discontinuance charges in HDFC Crest ULIP?
There are discontinuance charges that HDFC Standard Life levies if you decide to stop paying premiums before 5 years have passed from the day you start the policy.
|Where policy is discontinued during the policy year||Discontinuance charge|
|1||Lower of 6% of (AP or FV) subject to maximum of Rs. 5,000/-|
|2||Lower of 4% of (AP or FV) subject to maximum of Rs. 5,000/-|
|3||Lower of 3% of (AP or FV) subject to maximum of Rs. 4,000/-|
|4||Lower of 2% of (AP or FV) subject to maximum of Rs. 2,000/-|
|5 and onwards||Nil|
AP – Annualized premium
FV – Fund value on date of discontinuance
I have obtained this data from the policy document.
Do I get invested money back today if I discontinue my HDFC Crest ULIP?
An important consideration is that the fund value at time of discontinuance is not paid out to the customer. Instead, it is held by the insurance company till the end of the 5 year period. This sum earns 3.5% till the end of the 5 year period. This earning is a pittance. In general, it is another reason why I have a gripe with ULIPs. There are simply too many problems in getting out of a ULIP where a customer is made to jump through multiple hoops to reach the exit door.
Please read the Capital Mind article first and then come back to follow up with an Excel that I have created that will help you make a decision.
Should I discontinue or continue HDFC Crest ULIP?
- In this Excel the assumptions are placed at the start. You can modify cells marked in green. I have neglected service taxes in the calculations.
- I have assumed that premium amounts for first 2 years have been paid because this is the case that the reader is facing. You have a decision to continue with the third year premium or discontinue right here.
- The first half of the Excel considers that you continue with the policy. Here the various charges eat into your returns. They are relatively high as compared to the charges in mutual funds as you will see in the second half of the Excel. I have also deducted mortality charges that go towards the death benefit of Rs. 5,00,000/-
- There are three scenarios I have taken in the first half – 5%, 12% and 20% return in the underlying funds.
- In the second half of the Excel, I have considered a case where you discontinue the policy. For whatever is invested already in HDFC Crest, you earn a 3.5% interest rate as mentioned already.
- I assume that the amounts for third to fifth year are invested instead in an equity linked tax saving mutual fund.
- The requisite amount to get a life insurance cover is deducted every year. I have taken LIC Anmol Jeevan policy premium as an assumption for Rs. 5,00,000/- (same as the death benefit under HDFC Crest policy right now for the reader). I tried taking the HDFC Click2Protect term insurance amount but the premium calculator does not deal with premium amounts which are less than a particular limit.
- The second half of the Excel has comparisons between the two options – continuing and discontinuing respectively.
- Assume that the Crest fund manager’s deliver returns on their portfolio of 5% (before any charge deduction). Assume that an equity tax saving mutual fund also returns 5%. You will be better off by discontinuing the policy, paying the necessary exit charges and taking a fresh term insurance and investing similar amounts in this equity linked tax saving fund.
- I have next increased 5% to 12% and again compared the 2 options before us – discontinue or continue. You will be better off even in this case.
- Finally, if you increase expected return to 20%, you see that it is better to continue the Crest policy.
- This behavior is because the opportunity lost on the sum that is locked up with HDFC Standard Life, keeps increasing with increasing expected returns.
- Most importantly, please remember that expected returns cannot be forecast. I don’t know what the market will be 3 years from now nor do I know how Crest or any equity linked tax saving mutual fund will perform. These are assumptions and this is a model that tells you how things will be in different scenarios.
- Economics tells you to ignore sunk costs. In plain English, it means that you should not cry over spilt milk. In this case, the milk does not fall to the floor. You get it back, albeit after some time. The hitch being that you cannot put the milk to good use today since it is not in your hands.
- Expected returns of 20% for next three years would mean that for Rs. 100 invested at this rate would grow to Rs. 172. Or, a 72% gain in next three years. Or, consider that the Sensex would have to rise above 33,000 from the closing figure of around 19,242 on 23 December 2012 in the next three years. To me this seems to be on the higher side. But then that’s my opinion.
- You will also have understood that the lesser money you have locked in the better it is for you. In this case I have assumed that 2 premium payments have been made. If you have made 1 premium payment, the decision to discontinue is easier.
HDFC Crest does not look like a great product. For those who have already gone down the road with this product, discontinuing will make sense for a scenario with market returns that are in line with average figures.